We are seeing something unprecedented here folks. A government that sticks to its guns and does not give in to pressure tactics and threats, and on principal, is right to do so. The Board of Investment (BoI) has announced that there will be no revisions to the auto policy that was launched this time last year, and has suggested that the German Audi should come up with a better plan that would develop dealer networks, and establish a strong parts market. This column has been saying the same for months.
We have talked at length about the new auto development policy, (read our report: Playing your cars right) and we estimate the sector to locally manufacture over 500,000 passenger cars over the next few years, while commercial vehicles will also see a massive surge following growth in demand and potential entry of new players. The policy only gives 5-year incentives to new entrants or to revitalization of sick units, without any similar benefits to existing players.
Recall that earlier this year, Pakistani Suzuki said it would invest $460 million if the government gave the company some incentives under the policy as well. We were under the impression that the government would eventually succumb to Suzuki’s demands but that is not so. The administration believes it is time to let other players enter the game who would need the leg up to establish themselves in a market monopolized by three players
However, Suzuki’s proposed investment is sizeable. Can the government afford to aggravate a strong established player in the market? Suzuki has been operating in Pakistan for decades along with Indus Motors and Honda and is the only carmaker that has brought smaller engine and mini-body cars in the country. Its Mehran, Alto and Cultus have been favorites in the growing urban communities across the country. The new WagonR, the family hatchback is competitively sold against imported hatches such as Toyota Vitz or Passo.
Smaller cars are also lighter on the purse strings, and Suzuki has a large and cheap parts market. This is why Suzuki has maintained a healthy share of 60-70 percent in the market since it started operating, and it hasn’t found a lot of competition locally, other than from used imported cars that have fast been gaining momentum.
If Suzuki does not go through with the new investment, the market may not see more models of smaller engine cars, since the three new entrants (Kia, Hyundai and Renault) are likely to concentrate on above 1L and 1.3L&above category cars. That is where the demand is. But there is also a growing middle-class market that is looking to buy new cars that are small, have a re-sale value, and have readily available parts shop near their homes. They are looking at Suzuki with its new Alto, Celerio, and alternatives to Mehran.
But in absence of these new models, the demand gap then would be met by used car imports, and Suzuki could lose a big chunk of its market share. There are many imported substitutes to every locally produced car today. With cheaper financing, existing players should be worried. Though a cost-benefit analysis is beyond the scope of this column, it doesn’t seem feasible for Suzuki to not make the investment that it proposed.
Perhaps the company is banking on its localization, and the already established network of dealers, and spare parts to fare off the competition. But it should not underestimate what the new players could do in the next few years.
The second and most important part that this column has been saying is that just putting up a plant will not be enough for new players. Specially, with a German brand like Audi, which has very different (and high) quality standards that Pakistani vendors are not familiar with or even have the capability to cater to. A lot of investment will have to go into bringing Audi cars into Pakistan. But if they do enter, they will be highly competitive and will be in a league of their own.
We believe on both counts the government is correct. A consistent policy that brings new players into the mix, encourages efficiency and compliance of standards, induces competition and eventually take prices down is a good policy for now. Let’s stick around to see what happens next.
Comments
Comments are closed.