LOCAL ASSEMBLERS CAPABLE OF MEETING DEMAND

RISING POL/CNG PRICES FUELING SALE OF LOWER ENGINE CAPACITY CARS

SHABBIR H.KAZMI with FAHAD ALI
May 12 - 18, 2008

Pak Suzuki is the largest auto producer in Pakistan and the market leader with 62% of the market share. The company has regained its market share after the Government put ban on the imported cars older than 3 years in 2007. Pak Suzuki sales have grown at a CAGR of 29% from 2003-07, since major contributors to top line and bottom line of the company are Mehran, Alto and Cultus. Alto and Cultus are market leaders in the 1000cc car category with Cultus having 54% and Alto enjoying 37% market share. There has been staggering sales of Cultus in the year 2007 with 29,837 units compared to 21,390 units in 2006. The total number of units sold in 2007 was 129,826.

 

MEHRAN

CULTUS

ALTO

BOLAN

LIANA

 

FY06

FY07

FY06

FY07

FY06

FY07

FY06

FY07

FY06

FY07

Units Sold

35,982

37,007

21,390

29,837

16,823

21,988

10,451

15,566

4,571

6,067

Market Share %

22

20

13

16

10

12

6

9

3

3

Source: PAMA

Indus Motor has the second largest car producing capacity in the country. The plant capacity was increased to 50,000 units in 2006 from 37,000 units in 2005. The company is contemplating to further increase capacity to 70,000 units up to 2009. The company might further enhance capacity to 120,000 units till 2010. The sales of Indus Motors have grown at a CAGR of 26% from 2003 to 2007 and the main products are Cuore and Corolla. Corolla has been the undisputed King in the 1300-1800cc passenger car category with a share of 59% and is considered as most successful passenger car in Pakistan. Cuore being the other major product is a brand of Daihatsu Motor Company. It is an 800CC cars category car. The market share of Cuore in 800cc category was 20% in 2007. The car sales are higher in urban as well as rural areas because of factory fitted CNG kit. The sales volume of Indus Motors was 50,557 units in 2007compared to 42,406 in 2006. As a result this has been a remarkable performance in FY07.

 

COROLLA

CUORE

 

FY06

FY07

FY06

FY07

Units Sold

30,527

35,762

7,883

12,776

Market Share %

18

20

5

7

Source: PAMA

Prior to imposition of ban on import of cars used more than three years, the number of imported/reconditioned cars sold in the country had reached new levels because of higher premium and long waiting in delivery of locally assembled cars. Seeing the rising demand, the Government had liberalized the import policy of cars. Initially the duty was removed from all car imports whether new or reconditioned. The import of cars has had two effects; on one hand it has affected the local companies by taking a portion of their market share. While on the other side it had created a competitive environment since the local assemblers were forced to introduce new models with improved quality and new features. For example, imported Toyota Vitz gave hard time to locally made cars such as Cuore, Santro, Mehran and Cultus. The stable exchange rate had also helped the influx of foreign reconditioned cars. However, just recently the dollar has appreciated against the rupee while on the other hand the rupee has devalued.

With the imposition of ban on imported cars used for more than three years, the GoP also emphasized that the local assemblers to expand plant capacity. As a result, the local assemblers started expanding their production capacities, leading to demand being met by locally assembled ones.

In addition to the imposition of ban, there were some other issues with imported cars as well e.g. the auto parts availability, lack of after sales service and low resale value. However, imported cars are still a concern for the local auto assemblers because of large number of imported cars still standing at various showrooms.

TRACTORS

Although Al Ghazi and Millat Tractors are included in the auto assemblers sector, they have the dynamics very different from the motor car assemblers. The auto assemblers mainly manufacture passenger cars while the core business of Al Ghazi and Millat tractors is to manufacture and market tractors. The tractor off take is dependent on different variables as compared to cars and light commercial vehicles. The factor specific to tractor business is agricultural growth which in turn is dependent on farm income and farm credit since they determine the purchasing power of farmers (who are the main users of the product). In 2007 we have seen a good growth in tractor industry

 

AL GHAZI

MILLAT

 

FY06

FY07

FY06

FY07

Units Sold

24,649

26,927

24,153

27,125

Market Share %

51

50

49

50

Source: PAMA

According to Government sources there will be an investment of Rs 250 billion in the next five years in the auto sector. Most of this investment will be made by the vendors for capacity expansion to meet the target of 500,000 vehicles per annum by 2011-12. The Government's policy to make auto sector a major contributor to GDP brighten its outlook of the sector. However, margins of the auto sector companies are expected to remain under pressure due to weak dollar and rising prices of steel.

During the last five years auto sales were fueled by consumer finance/auto finance. However, with the interest rate hike and higher inflation automobile sales growth has decelerated to a considerable degree. Most of the borrowers are finding payment of monthly installments difficult. Since the financial institutions have hired services of "strong recovery personnel" borrowers prefer to skip meal but cannot afford to become a defaulter.

Maintaining and driving higher engine capacity cars is becoming difficult because of rising POL prices. With the increase in POL price, price of CNG is also going up. The way crude oil prices are creating one record after the other, it is feared that motor gasoline price touch Rs 100/liter very shortly. If price touches this level CNG, LPG and diesel prices would also become unaffordable.

Since crude oil prices are expected to remain high in the foreseeable future, effort should be made to ensure availability of bio-fuel. Import of LNG may be an option but creating infrastructure for its handling required huge capital expenditure.