Auto sector: Chasing cars

Nearly a year into the launch of the new auto development policy, things are shaping up. There are at least three different brand of cars poised to enter the Pakistani auto market. In a latest announcement, Nishat Mills informed in a letter to PSX that it is entering into a MOU with Hyundai Motor Company, South Korea and Sojitz Corporation, Japan to set up a Greenfield assembly plant in order to bring the Hyundai brand of passenger cars and commercial vehicles to Pakistan.

Nishat Mills is a subsidiary of the Nishat Group owned by the Mansha family and is in a variety of businesses including textiles, banking, cement, power and other sectors. Now the group is ready to enter the newly ripened auto industry. Earlier, another major private sector group Lucky announced its intentions to bring Kia cars to Pakistananother South Korean brand owned by Hyundai globally.

Recall that Pakistan has already had experiences with Hyundai and Kia in the past. Dewan Motors was producing Kia Classic and other Kia models as well as Hyundai Santro during the 2000sall1000cc and above passenger carsbut discontinued only a few years later as the group hit a major debt crisis, not to mention the demand for these cars did not really catch on. Kias success in the market was nominal at best, though Hyundai was more popular selling an average of 7,000 units annually between 2004 and 2006.

Aside from these comebacks, the Board of Investment (BoI) had announced the arrival of French carmaker Renault with a $100 million investment to work together with local partner Ghandhara Nissan to bring French vehicles (possibly sedan that will be 1200cc and above and SUVs) to the Pakistani population. Talks with German Audi are also in the works.

It is unclear how much investment these brands are bringing and how much Nishat and Lucky themselves will be putting in to revitalize these brands in Pakistan and what plant capacities the two brands are targeting. But there is no denying that demand is on their side. Pakistan currently has one of the lowest car penetration but income levels are improving; while urbanization is expected to surpass in Pakistan compared to other neighboring countries.

Immediate demand can be ascertained from the surge in activity of the used cars industry and motorcycle sales, which jumped by 20 percent between FY15 and FY16; selling 30,000 more units on a monthly average during FY17 than during FY16.

Car financing is another important factor to consider. It used to be at its peak during 2006 and 2007, but drastically fell in successive years. It gradually started to climb back up in 2014 and surpassed its 2007 heights (peaking at Rs113.4 billion in Nov 2007) since June of 2016. According to data retrieved from the central bank, auto financing went up by 15 percent between June and Dec of 2016, standing at Rs127 billion at the close of the calendar year 2016. This is the highest level of auto financing to date, and is expected to go higher.

While Honda recently launched Accord and will be introducing the new City, Pakistan Suzuki is the only one of the existing three carmakers that has promised a sizeable investment of $450 million to shake-up its car fleet. In fulfilling one of its promises, the company announced it will stop taking orders for Suzuki Cultus from Feb 01, saying goodbye to a model that has been in the market for 16 years. This is a move that may not bode well since Cultus was a small engine car and among one of the popular ones available in the country in that category. However, the company has indicated the new model that will replace Cultus will have greater localization which would make the car lighter on the purse strings, and will be an improvement upon the model.

With the new incoming brands, facelifts of existing models and investment by Suzuki, there will be a greater mix of locally produced cars in the next five years or so. But for the new entrants, there remain certain questions that we would need answers to. For one, it is unclear what engine cars are being introduced by the new players and what segment of the market they intend to capture. While the most popular cars historically have remained 1300cc and above; during 2007 and 2008, in times when income levels were higher coupled with greater auto financing and historically high auto sales, small engine cars were all the rage and surpassed sales for high engine cars. That was also a time when the likes of Diahtsu Cuore were being manufactured locally, reaching peak sales numbers. Later, popularity for small engine cars plummeted, picking up sales only very recently.

Different surveys of popular cars in Pakistan indicate that Toyota Corolla and Honda City are rated most favorablyboth high engine carswhile in the small engine variety, Suzuki Mehran, Cultus, Alto and Toyota Vitz fare well. Some of these cars are imported in used or refurbished condition and their popularity lies in their high resale value, low maintenance and upkeep and easy (and cheap) availability of parts.

Since so little information is available to us, we can only speculate to the relative long term penetration of these new brands. We do not know the level of investment, the capacities, the models and engines that will be brought. But as this column has highlighted before, the success of Kia, Hyundai, Renault and any other luxury brand will greatly depend on the value for money they provide.

A traditional Japanese car buyer would only shift to a new brand if its a good value for money, has a resale value and is easier to maintain. It is important for the new entrants to establish substantial after-sales services and dealer networks, while a parts market should be readily available for these new cars. Extensive planning and capital will have to go into to make this happen, and the burden of responsibility falls greatly on the local partners. This column applauds the competition part, and is on tenterhooks to see what happens next.