Under the Auto Development Policy 2016-21 of the government, several new entrants in the automobile business took their start in the Pakistani market. Regal Automobiles is one of those investors that leaped at the opportunity introducing passenger cars and commercial vehicles with Chinese carmaker Dongfeng Sokon (DFSK). BR Research spoke to Adeel Usman, the Managing Director of Regal to talk about the company’s plans over the next months and years as the automotive market develops. Adeel completed a bachelor of Business Management from Brunel University in 2011 and returned home to join his family business in 2014. Regal Automobiles began manufacturing operations in 2018 with the launch of its hatchback Prince Pearl and is planning to expand its offerings into high-end SUVs. Excerpts from the interview follow:

BRR: Tell us about the new SUV that you have just launched; what is the capacity and how is market acceptance so far?

Adeel Usman: Last year, in February, we launched our 800cc hatchback which is the most affordable hatchback of its time priced at Rs10.5 lakhs. Within 10 days of the launch, we had about 2500-3000 orders for the car and demand since has only been growing. Around that time, we also decided to venture into the compact SUV category. If you look at consumer behaviors in car-buying across the world, the trend is changing—consumers are moving away from sedan to crossover SUVs. As economies grow and livelihoods get better, more families are able to afford SUVs and choose them over sedans because of their features and drive. We are seeing a similar trend here in Pakistan—the shift has been pretty evident, with folks opting for SUVs such as Kia’s Sportage over the traditional Corolla-Civic combos.

With that mindset, we decided to test the market for our own prospective seven-seater SUV, DFSK’s Glory 580 Pro which we have begun to assemble locally now. The imported tested unit was well-received at the price we were offering it. It was a great value for money for buyers, and the only compact SUV that comes with seven seats at a substantial price discount of about Rs4-5 million for other vehicles in the market. The car is powerful with 1500cc turbo engine and also uses voice control technology to improve driving experience which I think puts it head and shoulders ahead of our competitors in the segment.

BRR: As you mentioned, you are selling the SUV at a steep discount from other options in the market. How are you able to do that?

AU: In August, we started pre-booking for the SUV. This is before the actual launch of the product in the market, which is a common practice around the world where pre-booking begins prior to the reveal and buyers can get certain advantages such as early delivery or price cuts. We did the same. We received 1000 orders in pre-bookings, even before the official launch.

Now coming to price. Yes, it is cheaper because we as well as our principal, the Dongfeng group believes Pakistan is an important market where we would like to first create a foothold. We are not taking the margins that our competitors are at the moment. We realize that we are a new brand and we need to make our presence shown in the market before we can make desirable margins. Dongfeng is giving us the best price for a number of Completely Knocked Down (CKD) kits as we capture the market and gain confidence of our customers. This means, obviously we are bleeding money but it is to build brand power which is the most important.

BRR: Can you give us an estimate of the costs you are incurring per car?

AU: If you combine mine and my competition's costs, in actual it would be Rs 4.8-4.9 million, including expenses. That’s where we break even but we are selling it for less—about Rs4.4 million for those that pre-booked, and Rs4.5 million for after-the-launch.

BRR: Tell us about the hatchback. Has it managed to create a market for itself, given it’s a small car?

AU: We started with about 4000 initial orders for Prince Pearl after the launch. But Covid-19 and march lockdowns disrupted the pace. We had to shut down the plant and didn’t book any new orders. In October, we started again and since then, we have about 1500 orders—about 500 cars per month.

I think, 2021 is going to be an amazing time to be a car consumer and car maker. Customers will be flooded with choices. Historically, customers were not risk-takers and would not adopt to new technology or brands so easily. That is slowly changing. Remember how the resale factor was the single biggest factor that played into car buying in the country. That is still there but the fixation is ending. The younger generation has a different perspective on the products they consume—they conduct their research, and make more informed choices. They are also more likely to take a leap of faith, which we as a company are banking on.

BRR: You are fighting a perception battle here, being a Chinese brand as well as competing with established Japanese players with confirmed brand loyalty. How do you fight that?

AU: Let’s take our hatchback. At the price we are offering our car—roughly Rs11.5 lakhs, we are offering a range of features—be it powered mirrors, power steering, back camera, AC and so on. Our competition in the category is Suzuki which at a price of Rs12 lakhs would offer no AC and only rotating windows. When we launched the car, Suzuki was giving 2-years and 40,000 km warranty—we decided to provide 3-years and 60,000 km. For a similar amount of money, our car is better. People have started to take the leap of faith. Our biggest war is to end the Chinese stigma by giving consumers quality products.

BRR: What is your production capacity at your plant?

AU: Our production capacity is 40 units per shift per day, and currently we are doing a single-shift production cycle. We are making several different variants, a major portion of which is the hatchback. We can do upto 3 shifts in a day, so our total annual capacity is around 37,000 units.

BRR: When you have the demand, why are you running the plant on one shift?

AU: Making a car is not basic—there are 3-4 players that have scaled skilled labor force in the automobile market. My team comes from Toyota and Hyundai plants but there is a shortage of skilled labor—we need about 300-400 more skilled workers for the second shift. To train new people, the turnover has to be high. Currently, we hiring interns from different engineering universities, and we are teaching and training them which will improve the labor situation over time but not immediately.

BRR: If we talk about demand, where do you see it headed? If we compare the motorcycle industry and how fast it grew in a matter of years because of new options and competition, do you see a similar disruption in the passenger car market.

AU: I think, quite easily yes. By June 2021 before the policy wraps up, the market will be flooded with choices. Just this month alone, there were about five new cars that have come into the Pakistani market. Over the next two months, our company is bringing another hatch back which is a 1000cc variant. Hyundai just announced it will be bringing Elantra. I think new players are working hard to take full advantage of the policy which will be disruptive for the market.

However, there are snags. We are made to stand and run from the back of the race. I’ll give you an example. Right now, vehicles sales are 70 percent on bank financing as interest rates are pretty low. This is good for a large number of new car buyers. The issue is, because the existing Japanese car makers have presence in the market and have a resale value, consumers get better terms on auto financing for their cars against us. Banks don’t have that confidence in us—some banks will take equity of up to 30 percent from our customer, and 15-20 percent from Honda/Toyota/Suzuki customer. We are losing this race.

BRR: One advantage that traditional Japanese car buyers have is inexpensive and accessible parts. That also helps build the resale value in the market. How much localization are you planning given the incentive structure will end after 5 years.

AU: You’re absolutely right. The resale value is dependent on parts availability in the market, and at a good price. We are making sure that the pricing of our car parts is affordable. As for localization, we have already started it with smaller parts and moving onto bigger ones. We have localized battery and tyres for instance, through local vendors.

One major problem in localization is investment into parts. If we want to localize a certain part, we need a certain level of investment that needs to go into it and provide the necessary support to the local vendor. Localization will be steady but slow process. We have a benchmark provided to us that we are following to keep on track with localization. We have Chinese engineers that visit our plant and ensure we are technically sound.

BRR: What is the role of your Chinese partner in decision making—do they have equity investment or is this purely contract manufacturing. How do you see your relationship evolve?

AU: Currently, we have 100 percent ownership for ourselves, but the decision-making process on the production side is heavy on Chinese input. For Glory Pro, we require Chinese approvals on quality assurance and on production itself. In the future, we want to make sure that they want to invest in us through a JV but with our leadership and stake in decision making intact in all aspects.