CHINESE EYE PAKISTAN AUTOMOBILE INDUSTRY

SYED FAZL-E-HAIDER. QUETTA
Oct 01 - 07, 2007

Recently, a visiting delegation of the Dong Feng Automobile Company of China has evinced interest in entering into joint venture with the Pakistan Automobile Company (PACO). The Chinese company intends to introduce its products- trucks, pick-ups and buses in Pakistan according to the market demand. Experts from both sides are currently working out the possibility and terms and conditions of a joint venture between Dong Feng and PACO.

The government has decided to revive Pakistan Automobile Company (Paco) as a joint venture with Dong Feng, rather than selling it to the private sector. The Dong Feng representatives had reportedly held initial parleys in Beijing during the recent visit of Prime Minister Shaukat Aziz in which the company representatives promised to visit Pakistan for further deliberations. The Chinese firm is reportedly negotiating to acquire 51 percent shares while the government will hold 49 percent shares of the company.

The Chinese auto manufacturer-Zhengzhou Hongda Automobile has also shown interest in setting up a plant in Pakistan for manufacturing of trailers initially and later specialized vehicles. In the third phase, it plans to start manufacturing light trucks. A delegation of Chinese Zhengzhou Hongda Automobile recently visited Auto Corporation of Pakistan (ACP) Pakistan Engineering Works (PEW) and Master Motors, along with their local partner- Globuiss Technologies and Trading, to assess the facilities and standard of work of these organizations.

Similarly, the Chinese car manufacturer "Chery" has been negotiating with companies from Pakistan to build car-manufacturing facilities in Pakistan. According to its plan, the local partner will invest in building plants and buying manufacturing equipment, whilst Chery will provide engines and parts to produce the cars.

China's vehicle market is the world's third-largest behind the United States and Japan, but the after-market segment is in its relative infancy. In the United States and Europe, after-market sales account for roughly 70 percent of the auto industry. According to an estimate, after-market sales accounted for one-third of the total industry in 2002 in China. It totalled roughly $23.7 billion in 2004. The sector has been growing at 8 percent a year and is on track to reach $31 billion this year. China's auto market has gone into overdrive in the last five years as millions of Chinese bought their first cars. Now, the market for replacement parts and service centres is racing to catch up.

With the entrance of Dong Feng, one of the biggest automobile manufacturers in China, it would be harder for the Japanese and Korean manufactures to maintain their dominant positions in the country's market. Established in June 2003, Dongfeng Motor Co., Ltd is China's first joint venture enterprise in motor vehicles with a complete series of trucks, buses, commercial vehicles and passenger vehicles. It was formed as a result of strategic cooperation between Dong Feng Motor Corporation and Nissan Motors Co. It has a registered capital valued at US$2 billion. This year, the company has a mid-term sales target of 620,000 vehicle units of which commercial vehicles will account for 320,000 units and passenger vehicles will account for 300,000 units. By the end of this year, it aims to double sales volume and revenue and achieve profitability growth by 10%. DFL is China's first joint venture enterprise in motor vehicles with a complete series of trucks, buses, commercial vehicles and passenger vehicles. The Dongfeng brand is used for its commercial vehicles and the Nissan brand is used for passenger vehicles.

Pakistan's automobile industry is an export driven industry providing lucrative investment opportunities for foreign investors. Over two dozens Pakistani manufacturers and assemblers have technical collaborations with Japanese and Korean manufacturers. The market is dominated largely by Japanese and Korean manufactures like Suzuki, Honda, Toyota, Hino, Hyundai and Mazda. The industry has set the target of manufacturing half a million cars and one million motorcycles by 2010. During first nine months of the last financial year, the automobile imports exceeded one billion dollars. The auto industry is expected to see a cut-throat competition in the next few years. Many foreign manufacturers including Chinese are reportedly in negotiations with the government to start assembly operations in Pakistan.

With the entrance of Chinese manufacturers, the industry has gone through a major phase shift over the past few years because low-priced Chinese products have created a situation of cut-throat competition in the market. The major segments of the industry include two wheelers, cars, jeeps, wagons, trucks and buses and tractors. Today many banks are providing auto financing and Pakistan has witnessed car sales boom in last two years. By introducing the modular-type manufacturing, Chinese manufacturers are producing labour-intensive products by mobilizing cheap labour force. The Pakistani manufacturers would not be able to survive even in the domestic market if they continued to imitate the Chinese strategy and to import components from China, says a study conducted by the Japan International Cooperation Agency (JICA).

According to the study, Pakistani manufacturers must avoid direct competition with Chinese industry and promote an integral type of manufacturing. The integral type production, which promotes assembly-type manufacturing such as motorbikes, automobiles and electronics. Under this type, product quality heavily depends on intimating coordination of each production process, or component designing. The relationship between functions and components of the integral manufacturing is highly intricate. Each component affects each other and determines the quality of final products. Automobile is a typical example in this regard. As compared to the locally manufactured cars, the foreign-assembled cars are still the first choice of the Pakistani customer, who is ready to even pay a heavy price for it.

JICA is of the view that integral manufacturing seems to be suitable for Pakistan. Moreover, East Asian countries such as Thailand and Malaysia carefully avoided direct competition with China and achieved rapid industrial growth. Japan has advantage in integral manufacturing, so their automobiles and motorbikes are much competitive internationally.

Pakistanis had better introduced a strategy focusing on manufacturing high-value and highly quality products and made its own brands recognized in the market. It has become a hard fact that cheap Chinese products have driven many local manufacturers out of domestic market. If cheap, low quality and counterfeit products are easily available in the market; it is very difficult to promote high-value, high-tech and internationally competitive manufacturing in the domestic industry. Islamabad is yet to decide whether it would make the Pakistani industry a subcontractor of the Chinese industry or it would promote the integral-type manufacturing to avoid direct competition with the Chinese industry.