'Price war is not our strategy' an interview with Norez Abdullah, CFO Hyundai-Nishat Motors

Norez Abdullah is the Chief Financial Officer of the newly incorporated Hyundai Nishat Motors (Private) Limited, a joint venture collaboration between well-known local and Japanese sponsors namely Nishat, Millat Tractors and Sojitz Corp. Norez has been with Nishat group since 2015 and has earlier held the financial advisor position at Nishat Power division. He has also worked for Hub Power for new ventures. Norez is a Chartered Accountant and has also attended Darden School of Business (USA).
The auto policy announced in 2016 by the government of Pakistan will witness a handful of new automotive ventures enter the market space, of which Hyundai-Nishat is one of the prominent ones. BR Research had the opportunity to sit down with Norez to talk about Hyundai's plans in Pakistan and how the market looks over the next few years.
Here are edited transcripts of the interview.
BR Research: What is the investment size? Tell us a bit about the joint venture and when are the first models arriving?
Norez Abdullah: The investment size is to the north of $150 million, which includes equity portion and some debt financing. Our plant is in Faisalabad. The government has made four special economic zones; where tax incentives are common, but in terms of the readiness of the infrastructure, I would say Faisalabad is the most advanced. Our plant is currently at the civil construction phase and trial production is likely to begin in the middle of next year; and we have already given our commitment to the government for December 2019 where we would be rolling out the first model from CKD.
BRR: Till that time, are you testing the market with imported models?
NA: Imported models are not a mainstay stream for us. We are establishing the distribution network side by side so when production comes online by end 2019, our distribution channel should also be ready. We are tapping in interested dealers both with and without dealership background across all the major cities in Pakistan.
BRR: We have had Hyundai, Kia and Nissan come into Pakistan before, and one of the reasons for their failure was their distribution network, the spare parts market and vendor relations. The market response was good, but the back-end preparation was missing. Do you think Nishat and Lucky are better prepared in terms of local partners than those in the past?
NA: They have certainly made a better choice this time learning from the past. There are a couple of factors where our optimism stems from. A lot has changed in the last decade for both Hyundai and Kia. The advancement they have made globally competing with the likes of Honda and Toyota and now they have also started to look eyeball to eyeball to the German auto manufactures in the luxury car segment with the advent of their brand Genesis. In terms of volume, they are now leading ahead Honda and Suzuki and trailing behind Toyota and Volkswagen. So the groups are much stronger than before globally. Plus, they now have much bigger brand acceptance globally and within Pakistan as well, what it was 10 years ago.
Secondly, the circumstances that the government has provided in terms of incentives were not available to previous auto assemblers. The biggest amongst them is the abolition of the deletion program and replacing it with a tariff based incentive. That gives us a lot of room to plan ahead. We want to start our localization at the start of the production which is the preferred mode, but even if it gets delayed for some reason, it won't hold us back in terms introducing ourselves to the market.
BRR: The policy says you can have 100% imported parts till year five at concessional duties, so you can live without localization for five years. But there is a fear in the market-not particularly directed at you-that the new ventures will enjoy these tax holidays for five years, assemble using imported parts, sell them in the market until they can and then exit.
NA: The preferred mode is that you should start localization from day one because it suits your vendor as well. There is no question about whether you can survive in the industry beyond five years without localization. It has to be part and parcel- otherwise you should look to pack things up. Within five years it is itself a challenge for the new entrants to recover but paybacks accelerate substantially over time with the size of the market so we definitely intend to stick around after the end of concession.
BRR: Are you partnering with some of the vendors?
NA: We are in touch with the vendor base. We are starting with the commercial pick-up category as a natural choice for us which is tried and tested in the market. The pickup has already been localized under the Dewan's brand and the local vendors are aware of its specifications so those vendors are now engaged with us.
As far as the passenger car segment is concerned, that will take a bit of an extra time. These are new products, and vendors have to undergo a development exercise for securing the license, drawings, and designs and would require our supervision and technical expertise along with the development of supply chain which is also at the core of our efforts.
The other thing we need to understand economically that every model is going to have a finite life. This is the information era. I feel Honda and Toyota have been lucky in the past that they have been able to get away with a model for 10 years. The lack of options has kept the consumers content on buying the same vehicles. With options now available, and the competition that is coming ahead, it would be very challenging for any manufacturer to carry a model for a decade.
So if you are putting up a life for a model of say five years, your vendor also has to make the most out of his investment as well. If he is not there from day one as your partner, and he is coming in at say second or third year, then theoretically he has that much life of the product to recover from. For us and for vendors, the optimum point is the starting point to start to work together.
BRR: Do you have a target for localization?
NA: Our targets are pretty fluid because every local vendor has to pass the test of quality firstly for each OEM. A lot will also depend on the agility and eagerness of the local vendors in putting up their money so all factors combined will define the pace of localization. From my end, the range can wary between 15-50 percent from the beginning.
BRR: What models in passenger cars are you targeting and in which markets?
NA: In passenger cars, we are looking toward Hyundai's success story globally. You will see some very popular variants in SUVs and sedans alike. They are also doing well in the commercial segment.
So we don't intend to experiment much with the brand, but look to bank on their global experience. So if Hyundai has a successful brand in India, Middle East, Far East or even the US which are performing globally well. That is what we would look to target.
BRR: Back when Hyundai went into new markets, the prices kept were significantly lower to other models. It took them a few years to succeed in those markets even then. Understandably, the global recognition of the brand now is much more. You don't have to give such an incentive in Pakistan but still, you will be competing with Fortuner, or Civic which are popular brands. Do you see yourself compete on price; and keep them lower to incentivize customers?
NA: As matter of fact I don't see much of a price war waging between us and the existing players. We are in this business for commercial reasons and price war is not going to benefit any of us. Hyundai's global brand recognition also does not warrant a price war or extreme discount compared to Honda, Toyota etc. We have to come up with a different strategy than price leadership and that's what we are focused upon, targeting better value for money for the consumers.
BRR: There is perception that whenever localization increases within any car, the localized part quality is usually inferior to the parts that are imported. If you have higher imported content, it will give you an edge for that period of time, in terms of quality. Are you trying to work on that incentive?
NA: Quality is going to be one of the cornerstones. If you look at JD Powers ranking lately; it is an authoritative ranking organization that ranks the brand quality technically of all the auto makers. In the last one year or so-in terms of the occurrence of defects, Hyundai and Kia, the two Korean manufacturers are now leading the quality benchmarks-and setting them in fact-for the rest of the world.
That sort of evolution we have seen in other industries as well where Korea has emerged as a distinct force. You talk about electronics, home appliances, mobile phones etc. They have done well for themselves. They catch up fast and tend to perform better once they get even. So yes, we do look to try and better the standards with their help and experience.
BRR: Do you feel there will be a space for hybrid and electric cars in this market?
NA: The decision is normally perceived to be taken in isolation. Electric cars are considered to be economical over a lifecycle or at least said to be the future. But apart from economy, we need to see whether there has been enough development on the charging infrastructure for those cars to serve them. That has to be there first. In Pakistan, this has been incentivized now in the recent budget; let's see if it continues in the coming administration.
For the hybrid consumers I feel, you need to have a certain critical mass in terms of mileage in order to recover the extra price you are paying for the technology. If you just have to use it to commute between you workplace and home, perhaps it won't be an affordable option for the most.
In terms of supply network, somebody has to take a leap of faith in establishing the distribution networks for the car followers to inspire their confidence. So for Pakistan, electric cars I would say, will take another 5 years at minimum to begin to make inroads.
BRR: Pakistani market is somewhere around 250,000 units and folks expect that to double by 2020. Do you agree?
NA: Yes, I do agree. Provided the foreign exchange does not spiral out. Car financing share is about one-fourth of the total car market so a lot would depend on the appetite of the banks as well. With the recent depreciation, if it continues till Rs 130-140, definitely, that's not good news. The fiscal prohibition for the non-filers on the purchase of new car is already seeing the backlog go down.
So external factors are going to play a role; but if even if they sustain in an environment which is supportive of the auto cars assemblers and consumers, there is still ample room to reach 500,000 and beyond.
BRR: Over time do you think we can export?
NA: Yes that's very much possible especially with commercial pickups which are not so demanding in terms of its features. Millat Tractors is already exporting. In fact, they are the cheapest manufacturers of that brand in the world right now.