AUTOMOBILE SECTOR

INTERVIEW WITH PARVEZ GHIAS CEO INDUS MOTOR

TARIQ AHMED SAEEDI
Nov 16 - 22, 2009

Automobile sector of Pakistan is reeling under a turbulent period much like the global auto industry. The sales of locally assembled passenger cars and light commercial vehicles that witnessed an impressive annual growth of 28 percent during 2001-07 dropped near 50 percent at the close of financial year in June in Pakistan. It is only because of the revivalism of sales in the first quarter (July-Sep) of this financial 2009-10 that automobile analysts in the country prognosticate turnaround in the automobile sector though some are still sceptical about full production capacity utilization. On global front, the expectation that total automobile production would reach to 90 million units per annum by 2015 was stumped by the economic downturn and now the counter is being reversed recently to have been fixed at below 55 million units. Global auto industry fell almost 48 percent.

Last fiscal year was not good for the automobile sector of Pakistan as the automobile demand of passenger cars and light commercial vehicles dropped rapidly 47 percent, affecting the profitability of automobile companies and government tax revenue. The segment of 850-1000cc witnessed a downturn in the first quarter. However, a noticeable increase in volume of 1300cc and above was registered. Toyota, a leading brand of Indus Motor, was a main contributor in the sales growth-out of total 30,787 units sold during the quarter 10,631 were Toyota and Daihatsu brands.

The market share of Indus Motor Company Limited (IMC), a joint venture between the House of Habib, Toyota Motor Corporation Japan, and Toyota Tsusho Corporation Japan, remains in between 25 to 35 percent.

Recently Page interviewed IMC's CEO Parvez Ghias to get his views on vicissitudes of auto industry. In this interview, he was asked of his viewpoint on concerns about some people that automobile foreclosures in Dubai would create supply gluts in Pakistan. Following are the excerpts from the interview.

IN MIDDLE EAST WHERE 70 PERCENT CARS ARE OUT IN THE MARKET ON CREDIT, BANKS ARE TURNING BACK TOWARD LENIENCY FROM STRICT CAUTIOUSNESS IN AUTO LOANS. WOULD YOU COMMENT ON IMPLICATIONS OF THIS FLEXIBILITY AND THAT WHETHER SUCH A MEASURE IS ALSO REQUIRED FOR REVITALIZATION OF AUTOMOBILE SECTOR IN FINANCIALLY SPARSE MARKET OF PAKISTAN? HOW DO YOU COMPARE THE TWO MARKETS CONSIDERING THE SUPPLY GLUTS PAKISTAN MARKET MAY HAVE CONFRONTED BECAUSE OF FORECLOSURES IN DUBAI?

Banks have already burned their fingers. As stimulus, they are adopting lenient approach. No repayment ability compelled many in Dubai to leave their cars outside airports and hotels to do away with instalments. In my view, the fear that foreclosures in Dubai would inundate Pakistani market with automobiles is unfounded. If this happens then it would be in a small degree. Say, northern areas would become a dumping ground. I would repeat the inflows would be negligible for two reasons. Primarily is because of the difference of right and left hand drives. Second, Pakistani customers are conscious about resale of cars. I do not think so they would take interest (in cars from Dubai).

SINCE LOCAL CONTENT RATIO IN AUTOMOBILE ASSEMBLING IN PAKISTAN IS INSIGNIFICANT, WHAT PERCENTAGE OF LOCALIZATION YOU FORESEE IN 2013? WHAT PERCENTAGE OF LOCAL INTEGRATION DOES IMC MAKE?

Let me correct this point. Local content ratio is significant though it is variable. It is better to review the history to know the localization of parts in auto making. Under deletion programme, every original equipment manufacturers (OEM) had to improve from the base and when deletion programme finished only Suzuki Mehran crossed 75 percent localization. Take Toyota as another example. It uses about 50 percent of parts manufactured locally. Entire nervous system of the car is equipped with local parts including lights, seat, steering, dashboard etc. It is however very difficult to predict that when precision parts would be manufactured locally under the current economic conditions. To further localization is a conviction of OEMs.

At present, the problem is drops in volume. The plants are under capacity utilization. Now, efficiency is required. Last fiscal year, volume drop had adversely battered the economy segment of Indus Motor, falling 60 percent. Daihatsu Cuore volume also decreased 52 percent.

First quarter financial results show a 99 percent jump in sales growth of Toyota Corolla (and Daihatsu), outpacing Honda and Suzuki in above 1300cc segment by great margin whilst government also removed five percent federal excise duty on cars above 850cc. IN SPITE OF THIS, YOU HAVE DECIDED TO INCREASE THE PRICE OF IMC'S FLAGSHIP BRAND. WHAT WAS THE REASON?

Exchange rate depreciation and high industrial overheads made us to revise upward the price. XLI is our most saleable product. Its quoted price was Rs1050000 when one dollar could get you 60 rupees. Right now, a dollar is equivalent to about Rs83 and the price is Rs1269000. Notice the difference of exchange rate. We cannot give price benefits at the expense of the company. By November end, the problem would be solved largely however. We are planning 10 percent decrease.

You know, we had been consistently losing money on manufacturing until March this year. Only in Jan-Mar 2009 we hit break-even and started earning profits actually afterwards. The company posted after-tax profit of Rs1.17 billion in the quarter ended September 30, 2009 as compared to Rs57.25 million in the comparable period.

IMC IMPORTS HIGH-END VEHICLES LIKE LAND CRUISER, CAMRY, HILUX, AND PRADO IN THE COUNTRY, HAS ECONOMIC DOWNTURN AND IMPORT POLICY AFFECTED THE SALES OF THESE VEHICLES?

Yes, the sales of these vehicles reduced to 20 to 25 units. Price factor played a major role. For instance, two and half year back Camry was sold at about 2.7 million rupees right now the price went up to 6.5 million rupees. Strict duty regulations increased the price. During last fiscal year, this CBU segment was shrunken 59 percent. Notwithstanding, IMC's market share in cars with engine capacity in excess of 1800cc was 75 percent.

IN THE REGION, WHICH MARKET DO YOU FINGER AT AS POTENTIAL EXPORT DESTINATION IF PAKISTAN WOULD BE EXPORT-BASE?

It is undeniable fact that Pakistan has the strategically positioned advantage. We always try to sell Pakistan's location. The country can become the leading exporting hub. I would like to think that Pakistan would become an export-base of automobiles. While there is a need to further localization, it is also important for policy makers to put their thinking caps. Complex is the automobile industry. The multiple factors are involved to have a robust industry. The jigsaw puzzle needs to be set. First, we need to find products, which are low priced. We must realize that a sizeable population cannot afford high price.

HOW CAN THIS HAPPEN? CAN WE TOE THE INDIAN LINE?

It is difficult to play match with India because of the immense difference in production volumes. The units produced in Pakistan are minuscule of what are being produced in India. An Indian automobile company launched low-priced cars [having an advantage of economies of scale].

WHAT ARE IMC'S CSR ACTIVITIES?

Corporate social responsibility is a subject of my interest and I think a company has to involve itself personally in such activities and just signing a cheque for the cause is not enough. Indus allocates one percent of its pre-tax profits for CSR activities, which spread to education, health and other social sectors. Specifically, our road safety programme has been a great success. Under the programme, we are conducting a research to gather information about road accidents. We have appointed 40 enumerators in five major hospitals to ascertain the data about road accidents. The data have been published, but the research is an ongoing process. With this data now, I can point out for sure what are the most, for example, frequent timings and locations of accidents. This can also be beneficial in improving traffic engineering. IMC has spent over Rs100 million in five years for health, education, welfare, environment, and road safety projects.