RajaRawal111
Prime Minister (20k+ posts)
FRENCH carmaker Renault announced last week that it is entering the Pakistani market. The company said it had signed definitive agreements with Al-Futtaim, a Dubai-based firm, for “exclusive assembly at a new state-of-the-art plant in Karachi and distribution of Renault vehicles in Pakistan”.The two partners expect the plant will be built starting the first quarter of next year. Car sales are planned to start in 2019, ramping up in 2020.
Renault said the company aims to become a major player in Pakistan, bringing its latest products and cutting-edge technology to set new benchmarks of safety and quality. Indeed, Pakistan offers a huge opportunity to carmakers as demand for cars and commercial vehicles is growing at an annual rate of more than 10 per cent.
“With a population of more than 200 million, a rapidly growing economy and a vibrant middle-class are likely to push the market size from fewer than 300,000 units at present to more than half a million by 2020,” Syed Nabeel Hashmi, a leading Lahore-based auto-parts maker and exporter.
The road network being built across the country under the multibillion-dollar China-Pakistan Economic Corridor (CPEC) will continue to provide additional, major impetus to auto sales over the next several years.“With half of its population below 30 years and car penetration as low as 13 vehicles per 1,000 people, Pakistan is one of the last remaining populous countries to go through rapid growth in motorisation. Which other market in the world matches the opportunities offered by Pakistan to global carmakers? None,” he says.
Pakistan is said by many carmakers to be one of the most dynamic markets in Asia. Little wonder then that tax and other fiscal incentives offered in the new Automotive Development Policy are attracting new brands.Two Korean brands — Kia and Hyundai — have already partnered with Younus Group and Nishat Group to set up their plants for starting local assembly of their cars by 2020.
A growing competition is now forcing the existing auto manufacturers to invest in upgrade and rethink their strategy
Volkswagen is also interested in investing in business ventures in Pakistan in a market starved for a wider range of good-quality cars while Chinese brands also plan to bring in cheaper cars to help middle-class households transition to four-wheelers from two-wheelers.
As the new automakers extend their footprint into Pakistan, growing competition is forcing the existing ones to invest more money in technology, introduce new models, improve their quality and safety benchmarks, and rethink strategy for maintaining their present market share.
“We expect strong competition from the new (Korean) carmakers setting up their assembly plants,” says Hiroyuki Fukui, Toyota Motor Corporation’s chief executive officer for Asia, Middle East and North Africa region. “We are preparing our strategy for Pakistan because it is a very important and growing market for us. We plan to launch smaller cars in the market as well. But we cannot disclose our plans yet.”
Many like AKD analyst Ali Asghar Poonawala feel the entry of new brands will drastically change the dynamics of Pakistan’s auto market. “New entrants are expected to compete on price points. The 20pc-25pc discounts they have under the ADP-II will likely encourage price-based competition,” he underscores.
He says the existing Japanese OEMs (original equipment manufacturers) are focusing on localisation, investing on plant and machinery, improving efficiencies by reducing production line bottlenecks, and introducing new models and upgrading the existing variants to compete with new players when they start production.
Besides, the existing assemblers are also improving safety features in their cars to attract buyers. Indus Motors, for example, is now providing safety airbags (only for drivers though) in all its Toyota vehicles even though it is not mandatory under government laws. They are adding features they had never thought of offering in this market before, says Mr Poonawala.
Mr Hashmi feels that small hatchback cars will drive the market growth in future. “I see competition becoming fierce in 2019-20 with many options available to car buyers. Localisation of parts will be the single most important factor for survival for the OEMs and, therefore, it must be faster and cheaper.
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“Whether the new players can sustain in this market and create a place in the market for their vehicles depends on market segments they plan to target. They must install manufacturing capacity of at least 50,000 units a year with export capacity to show their seriousness and long-term commitment to this market and invest in supply chain for faster localisation to stay price competitive,” he adds.
But a senior executive of a car company laments the government policies are hurting localisation. “The prohibitive regulatory duty of 20pc imposed on components used for local assembly of car air conditioners has eroded the 5pc-8pc advantage of local car AC manufacturers. Similarly, used cars are exempt from regulatory duty but new cars aren’t,” he says.He dismisses criticism that the existing brands have failed to deliver quality and safer cars to Pakistani consumers.“Our low economies of scales have kept Japanese assemblers from not only increasing their production capacity but also introduce new, latest models.
“You cannot bring so many vehicles using latest technology to Pakistan because we do not have the kind of roads, fuels, traffic regulations and policy incentives required for them. On top of that we also need to see if our consumers can afford those models?“There may be a very strong demand here for new cars using AI (artificial intelligence), for instance. But do we also have the kind of road infrastructure or traffic laws required to support those vehicles? No.
“Those who import such vehicles have to disable many functions before bringing them on to roads in Pakistan. What’s the use of that? More than that, we also have to see if the demand for such vehicles is consistent with the price. After all, no manufacturer would want to go into a market and sell just one car.”
Published in Dawn, The Business and Finance Weekly, November 27th, 2017
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