Aug 18 - 24, 2008

Over the recent few years, Pakistan's auto industry has witnessed sanguine growth, thanks to abundance of auto financing options available in the market coupled with improving economic fundamentals. If we look back in the early times of the recent decade, we shall observe that Pakistani people have been suffering from ever increasing inflation, leading them to strive hard for meeting their day-to-day needs. While this has made almost everything far expansive, our nation has shown resilience to all these challenges by collecting energy in a more prudent manner.

Yes! We can observe a shift in the life style of our people. Besides so many things, now, having own conveyance is more like a need rather than a luxury as historically assumed. Specially, the ongoing spree to improve living standard in the middle class is more obvious. In the recent age, we see more cars on roads when compared to previous decade. This can make someone feel happy about it, even though there are anomalies hidden or obvious on many fronts.

Improving overall economic fundamentals, leading towards increasing per capital income, the shift in people perceptions regarding life style, and above all tremendous car financing options floated by banks and non-banking financial institutions have all contributed towards stellar growth of auto industry in Pakistan. The industry has played a vital role in revenue generation, job creation, foreign exchange and technological developments. However, owing to low level of productivity in absence of economies of scale, Pakistani auto industry's sales remained confined to the local market, and the industry couldn't take any breakthrough in the export market. Our auto industry mainly consists of four major players: (i) Pak Suzuki Motors - Suzuki - (ii) Indus Motors - Toyota - (iii) Honda Atlas Cars - Honda - and (iv) Dewan Farooque Motors - Hyundai and Kia. Except Dewan Motors, all major motor assemblers have technical collaborations with Japanese car manufacturers. Dewan has technical collaboration with Korean car manufacturers. Pakistani consumers, in general, consider Japanese brands more reliable, long lasting, and of superior quality. At the same time, resale value and availability of parts have critical importance to make predominant position of any particular brand. All these factors have made it difficult for new entrants to establish presence in the market.

The rapid growth, dated back to 2003, in demand of cars led to widening demand & supply gap, which resulted in extending of delivery schedule by auto assemblers. This, in turn, also resulted in substantial premiums in the open market on ready delivery of a new vehicle. In an effort to curb this gap, the government relaxed the import policy, which while minimizing the gap and offering more choices to consumers, gave stiff competition to local assemblers who consequently reduced premiums on ready delivery and caused boost to indigenization. Nevertheless the import policy had negative implication on some market players, especially on their 1000cc cars segment. The major hit on margins was felt by Hyundai car manufacturer since the company witnessed dent on its margins along with substantial loss of its market share.

With international crude prices touching skies thereby escalating to gasoline prices all times high, automobile manufacturers have left with no option than produce fuel efficient cars that can run on alternate energy sources. Pakistan auto sector is tackling this issue by introducing vehicles run on CNG. Our country is the largest user of CNG vehicles in Asia. The increased use of CNG reduced the fuel cost and helped in satisfying growing demand of crude.

After five years of robust growth (compounded annual growth rate of 29%), Pakistan's auto industry's demand has collapsed in FY08. Obviously, this remained in line with slow down in overall economy in recently ended financial year, thanks to our government and political environment neglecting the country's prosperity. As per the latest auto figures released by Pakistan Automotive Manufacturers Association (PAMA), overall passenger cars segment sales have declined by around 11% in FY08. The "perfect storm" of negative factors has affected the auto industry this year. State Bank of Pakistan's tight monitory policy leading to soaring interest rate, coupled with conservative stance of conventional banks - an outcome of increasing delinquencies in auto financing - have crippled down buy of new car. The economic slow down and sky rocketing double digit inflation has eroded the purchasing power of consumers. Moreover, deteriorating political law and order situation prevailing in the country has dented the consumer confidence in extremity. Nevertheless, Light Commercial Vehicles (LCV) segment has been able to stride through the gloom by registering a nominal growth of around 3% in sales.

Pak Suzuki, the company with the largest production facility among local auto assemblers, had the major chunk of market share of 62% in FY08, which increased by 84bps on YoY basis. Indus Motor on the other hand has been the second largest in terms of market capitalization, having its market share increased by 171bps YoY. Yet, Honda and Dewan Farooque Motors lost their market shares in FY08 by 144bps and 108bps respectively. Toyota had endured minimum hit during the year as compared to other auto assemblers operating in the country, as its sales decreased marginally. The company's lynch pin - Toyota corolla - has displayed some resilience in the wake of overall gloom gripping the sector. Moreover, the company managed to maintain its share in the sale of small 800cc car (Coure). Indus Motor has suspended booking of corolla since June 2008 and according to the company sources this halt in the booking is due to the shortage of CKD (completely knocked down) kits. However, dealers of the company quoted the imminent launch of new model of corolla as the reason behind this temporary suspension. The dealers expect that Indus Motor will resume booking in September this year. The company's sales mainly comprises of corolla, contributing around 67% of total sales.

Owing to suspension in bookings the sales of the company may decline in FY09. As regards Suzuki, owing to steep fall in its Liana sale the company's sales registered a decline. The sales of 1000cc segment-Cultus and Alto-that both have been top performers over years, also witnessed slight slump. Moreover, the most economical car, Mehran, also couldn't withstand the pressures and its sales fell down by 4% during FY08. Honda Cars also have had another gloomy year, as its sales remained depressed with an overall decline of 23% YoY.

Looking ahead, the challenges faced by the auto industry of Pakistan, such as, rising steel prices, escalating interest rates an outcome of tight monitory policy and conservative stance of banking sector on auto financing - and deteriorating economic indicators are all expected to dampen the industry's performance further in this fiscal year. Nevertheless, Pakistan's auto industry that has recorded significant growth in recent years still has room for further growth. This can be evidenced by the fact that Pakistan has one of the lowest motorization levels in the region especially when we compare it with India and China. This simply indicates arcane potential and opportunities lying latent for excavation though the pace would be a bit slow due to aforementioned factors.