Car disruption in second gear

Pakistani car industry is going through a disruptive phase. The Automotive Development Policy (ADP) 2016-21 is reaping fruits in terms of enhancing competition as new entrants are making their mark. The consumer is getting more choices to select from but overall the pie of the market is not growing. For that to happen either the government has to reduce the duty structure across the board (once 2016-21 policy is expired) or the economy has to grow consistently at 4-5 percent for a few years. Giving any further incentives to new entrants (or to existing) without expansion of the market size could be counterproductive.

The industry historically has been captured by three Japanese players. The Japanese model is to keep minimum inventory as they usually produce cars less than what is demanded by the market. Inventory in Pakistan is traditionally maintained by car dealers while assemblers work on direct demand. That is why during times of higher car sales, the cash and short-term investment of assemblers were high while dealers were drawing cash lines for working capital needs. Since dealers invest in the inventory, they charge infamous 'own' for instant delivery.

The other model is American where assembler produces more cars than what is demanded. The idea is for the consumer to get the car delivery instantly at tagged price or even at a discount. In many cases, both producers and dealers keep a certain level of inventories to gain market share.

In Pakistan, Lucky Motors business model is somewhere in between. They have started assembling with an aggressive approach. Their market research was good and the group took bold decisions in terms of investment and initiative. They imported a higher number of kits to assemble more cars than what was demanded by dealers. To their luck, the demand picked up and they are being able to deliver cars within 1-3 months of booking. The 'own' is less on Kia Sportage while its sale is more than any other model in 1800cc and above engine.

On the other hand, sponsor of Tuscan imported kits; but market demand surprised both dealers and assemblers. There is a hefty 'own' on Tuscon as the supply is constrained. For example, Sportage is selling 1,200-1,300 cars a month while Tuscan's supply is less than 300 cars a month currently. It's not high demand but rather short supply that is creating the 'own' in the compact SUV segment.

Nishat (Hyundai) attempted to adopt the prevailing market practice of keeping low or no inventory and let the dealer assume the inventory risk. The consumer is generally at a loss as this model creates a layer of sleeping investors in the middle. Consumers either have to wait for months for car delivery or pay the premium. Higher the wait, high the premium that needs to be paid.

This premium only makes sense when the assembler is operating at full capacity. But barring one or two good years in the past, car production was never at full capacity. The assemblers were more keen on saving money by keeping investment in inventory at minimum. Such practices become difficult with growing competition.

Assemblers are doubled (or even) more while the demand is not growing. The new entrants are taking the market share of existing cars. For instance, Sportage and Tuscan are creating market for compact SUVs; but at the same time, the Civic-Corolla market share is shrinking. Honda is now launching 7th Generation City (though it skipped the 6th Generation). Toyota has launched Yaris.

The story of competition does not end here. The new players are keen on launching models before the expiry of ADP in Jun-21. Kia is launching Sorento (old model as it will take 2-3 years to launch new model) and 2-3 other SUVs/crossovers. Hyundai is launching two Sedan models and they are chewing on the idea of launching one SUV (Senta fe). But they are short of time.

The sponsors are saying that if they get a few months' extension in policy, they may launch it. However, this will not be fair with Lucky Motors as the group made higher investment and took the risk of new strategy. Now everyone knows that the SUV market is developing and would like to participate in it. But the risk taker should get the first mover's advantage.

A couple of other new assemblers are launching cars too. The market will have numerous options given its tiny size. Folks are saying that once ADP 16-21 is expired, there should be some incentive for older Japanese players to expand. But that may kill a few players.

The focus rather should be on to expanding the whole pie, so more players have breathing space to play. For that, the economy must grow. Once per-capita income is up, all these players would invest invariably- with or without incentives. Some say there are elements of transfer pricing in the market for too long. The new entrants may reduce this as old players would find it hard to compete under current structure. But the key to bringing efficiencies is to reduce regulatory duties on imported cars.

Having said that, the competition is mainly in high end cars. The local SUVs market is in the making. There are not many option in budget cars. The existing policy has moved Corolla/Civic consumers to compact SUVs. The next policy should concentrate on graduating motor-bike users to budget cars, and have those incentives in place to promote investment in the affordable category.