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New entrants aim to take the auto market by storm

Amid inconsistency in the policy as always blamed by the existing auto assemblers – the new foreign auto makers are highly optimistic for a promising future of Pakistan’s car and heavy vehicle sectors especially.

They see a robust demand of cars in view of low interest rates and rising standard of living of middle class. For heavy vehicle sector they pin hopes on additional demand of heavy vehicles depending on the success of China Pakistan Economic Corridor (CPEC).

Pakistani print media in the last six to eight months have run a series of lead stories relating to the intention of European and Korean car makers dying to take a plunge in the market dominated by Japanese car makers like Toyota, Honda and Suzuki.

In heavy vehicle segment Hinopak Motors hold big a market share in trucks and buses followed by Isuzu and Nissan.

Some Chinese brands are looking forward to make a deeper inroad in view of CPEC related demand but Japanese brands are far superior in technology and quality than Chinese brands.

Arrival of new comers is certainly big news for the car buyers who are not satisfied with the products being rolled out by the Pak Suzuki especially. Vending industry must be excited for getting additional orders for part making in case more local assembly plants are set up. Besides, the new entrant arrival would also open new job avenues especially in the vending industry.

PML-N government deserves the credit of making friendly new entrant auto policy on which foreign players’ are ready to cash their luck in Pakistan’s volatile economic and political situations.

PML-N appears highly satisfied to win the election 2018 despite its unfulfilled promises on new power generation plans and insecurity situation. In case the ruling party again comes into power then it will really further prove helpful for the world car giants who have already shown their interest and some of them have inked MoU with local partners besides purchasing land for the new plants.

However, in case the Pakistan Peoples Party takes control of the country in 2018 polls then it is hard to say whether the new government will maintain the policy of PML-N government of encouraging foreign investment in auto sector or it will change or amend the policy.

Certainly the result of 2018 elections must be in mind of the foreign car and heavy vehicle assemblers who will also decide whether they would honor their past commitment and confidence which they have shown now to the PML N government or will roll back out in case other than PML N government comes in power and introduce changes in the policy.

Sources said that new entrants are slowly and cautiously moving towards their future plans in view of 2018 elections and its results. However, purchasing land by car giants is not a heavy burden on them as land prices have always paid very high in Pakistan especially in PML-N government rule since May 2013.

However, the existing car assemblers have always blamed inconsistency in the policy of various governments due to which they (especially Pak Suzuki and Indus Motors) could not introduce new models.

The governments have also encouraged used car imports which definitely eroded the market share of existing assemblers. Despite this huge interest of European and Korean players to set up assembly plant is surprising as they are relying on incentives which the new auto policy 2016-2021 has promised.

Perhaps the buyers’ rising tilt towards used cars and their thriving imports have lured foreign players to tap the potential.

Contrary to the reality that bulk of imports comprise of used 660-1,000cc vehicles the European and Korean car assemblers intend to introduce their low engine power vehicles which will compete with used cars as well as local made Japanese cars.

One of the things to lure foreign car makers is absence of any strict action by the previous and current governments on increasing car prices by the assemblers. The governments had never taken to the task the assemblers for pushing up prices three to four times a year on currency parity and other excuses. Even the on money menace still exists due to delivery of vehicles in three to six months.

It seems that these players are not interested in taking a big slice or give a tough time to the existing players. They will initially focus on the volume of 40,000-50,000 units which the used car importers have captured by bringing in three years old vehicles under various schemes introduced by the government.

As the Budget 2017-2018 is round the corner, used car importers have started building up pressure on the government for more concessions so that consumers can get easy access to the high quality used cars. On the other hand, local car assemblers will do their best to avert the pressure of used car lobby urging the government to further tighten used car imports so that their market share could improve.

Chairman All Pakistan Motor Dealers Association (APMDA), H.M. Shahzad urged Finance Minister Ishaq Dar that the car assemblers continue fleecing the people in the shape of advance payment at the time of booking of a car and delivering the vehicle in three to six months. As a result of delays in car delivery, the black marketer charges a hefty premium “on money” from the people.

He said assemblers arbitrarily increase the price of their cars as and when they desire. After allowing Import of three years old car model – the local assemblers are enjoying monopoly on prices besides providing limited choices for the buyers.

Shahzad urged the government to allow commercial imports of used vehicles of up to five years of age limit in addition to existing import of vehicles under various schemes. It would also bring the import of used vehicles business into the tax net and help the Government expand its tax base.

He said the local industry had never passed on the impact of depreciating Yen to the consumers in shape of price cut in cars.

He suggested the government to impose a fixed rate of duty on the import of used vehicles of engine capacity of above 1,800cc.

The government, sources said, is unlikely to accept demands of the used car importers in new budget as it could not afford to ruin its plan of encouraging investment from European, Korean and Chinese assemblers.

However, the incentives for new entrants appear highly attractive for which the existing assemblers like Pak Suzuki, Al Haj Faw Motors and Dewan Farooqui Motors are struggling to get same on which the government has so far not given any green signal.

Pak Suzuki with an investment plan of $660 million has sought same benefits/incentives for two years from the start of mass production of new models instead of five years granted to new entrants in the Auto Policy 2016-21.
Al-Haj Faw had requested for new entrant status under the new ADP 2016-2021 as Greenfield. The company opined that the new policy deprives companies of any benefits and as such it would not be able to compete with new entrants.
Daehan Dewan had requested the government for granting Brownfield status to their unit under new ADP 2016-2021 for production of Daehan, Ssangyong and KIA range vehicles.
The cases of Al-Haj and Daehan Dewan were referred to Ministry of Industries highlighting the facts that though these are not exactly within the strict parameters of ADP 2016-21, both matters present opportunities for investment, competition in the market and thus might justify special treatment.
However, the ministry felt the treatment can trigger similar requests from others and company specific modifications in the ADP 2016-21 at this stage as it would counterproductive.
Perturbed over lukewarm response to earlier requests, Pak Suzuki said it would review its decision to invest $460 million if the government fails to respond to its request for incentives until April.
Pak Suzuki, which has purchased the land, said total promised investment is around $660m in which foreign direct investment from Japan is $250m. PSMCL is going to arrange $210m through its own funds and bank borrowings while vendors will invest $200m. This is a one-time investment. The plant’s completion will be in 18-24 months.
Coming to new entrants, leading business groups, who had made huge profits in their decades old business, are now ready to take the auto market by storm.

Nishat Group, which has recently entered into an agreement with Hyundai Motor Company to set up a car assembly plant in Pakistan, is planning to introduce electric and hybrid passenger cars. It wants to first start the assembly of small cars to compete with the existing Japanese assemblers.
The company would import these cars in the beginning and later also start assembling them locally. Nishat Group would invest $120m in the project that will be set up in an industrial zone near Faisalabad. The company has acquired land for the plant.
Nishat Group will have 42 per cent stake in the new company with Millat Tractors holding 18pc and a Japanese firm 10pc. The remaining shareholding will be offloaded on the country’s stock market.
Lucky Cement, a company owned by one of Pakistan’s largest business conglomerates Younus Group, has partnered with Kia, yet another Korean car brand, to assemble cars as well as commercial vehicles in Karachi.
French car maker Renault plans to invest $100m in the Ghandhara Nissan plant to bring its brand into Pakistan.
It is not clear how Hyundai and Kia would create new interest among the customers who had already experienced these vehicles introduced by Dewan Motors which later wrapped up these projects in late 2000s due to financial problems. Hyundai and Kia had low resale value at that time.
German car maker Audi AG expresses intent to assemble vehicles in Pakistan by setting up a plant. Through its authorized importer in the country, it has submitted a letter of intent to the Board of Investment (BoI) for consideration.

The land for the plant has been purchased in Korangi, near one of Pakistan’s biggest industrial estates, and would mean a fresh investment of over $30 million which looks meager as compared to investment by Korean counterparts.

Audi representative in Pakistan foresees the prices of lower-engine models to decrease in the range of 5-10 per cent if assembled in Pakistan. With regards to the heavier engine models – over the 1.8L categories – he sees a much bigger decrease of around 20pc.
He means the A3 model, currently priced at Rs4 million, could come down to between Rs3.6 million and Rs3.8 million.

It is not clear how Audi would survive on very low volume of sales per year for which it needs special incentive from the government. Due to lack of volumes – some assemblers had already packed up their business in Pakistan while existing assemblers say that they could not invest in new models due to thin growth in volumes and inconsistency in government policies.

Even low volume would also not attract any local vendors. The German car maker would require at least 15-20 years to procure local components from the vendors depending on attractive sale volume.
BMW is planning to launch lower end and mid range models in Pakistan, which is surprising that how a luxurious models can be cheaper.
As per media reports – BMW hasn’t decided to set up a local car assembly plant though.

The major attraction for foreign companies is the new policy which allows these investors to import tax free manufacturing plant equipment and pay less taxes on import of parts when assembly starts plus various other incentives that can help new entrants in the automotive industry to set up their operations in Pakistan.
National Logistic Cell will invest in auto sector with German collaboration in order to cater the rising demand of heavy commercial vehicles following the commencement of China-Pakistan Economic Corridor (CPEC).
NLC has planned to install production plants [in Pakistan] with German Company to produce prime movers.
The NLC will initially be investing Rs500-700 million to install a production plant in Pakistan in a bid to manufacture heavy commercial vehicles in collaboration with German MAN Truck and Bus Company.
In the first phase, trucks will be produced to meet the requirements of Pakistan Army while in the second phase — keeping in view the rising demand under CEPC — heavy commercial vehicles will be produced as well.
Around 700-1,000 heavy vehicles will be produced annually and later on the production capacity will be enhanced accordingly.
Volkswagen Commercial Vehicles is in final talks with Premier Systems Private Limited – the authorised importer of Audi vehicles in the country – to set up a manufacturing/assembly plant for its Amarok and T6 (transporter range) models.
On one hand the government is attracting foreign car players with its new auto policy and on the other hand the Government has made a change / amendment in new auto policy through SRO 483 dated 29th June, 2016 which states that it is compulsory every light commercial vehicle assembler has to establish ED Coat Painting system in his auto assembly plant.

Al Haj FAW has invested around Rs 400-500 million for the establishment of ED painting system including the cost of land and material. This ED painting system consists of eleven tanks and backing system can bake more than one vehicle at a time. The dipping tanks and baking ovens size is too huge that can even paint and bake Prime Movers cabin.

One thing is now sure that every new entrant would need to invest Rs400-500 million at least for ED painting facilities as per government’s directives. In case the new entrants fail to achieve desired sales volume — the plant and machinery investment coupled with ED paint facility would go in waste.This is certainly a risk on which the new entrants need to ponder.

By team Automark, Exclusive article published in Monthly Automark Magazine’s April-2017 printed edition

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