‘Overall FX regime discourages foreign investors’

An interview with Umar Ahsan Khan, CEO Dawlance

Umar Ahsan Khan is the newly appointed Chief Executive Officer of Dawlance, the leading home appliance company in Pakistan and a subsidiary of Arçelik A.S.Turkey. Turkey.

Mr. Khan has almost 29 years of experience and is an accomplished and regionally experienced executive, seasoned in pivotal hands-on leadership roles within major national and multinational enterprises, providing strategy, operations, finance and accounting leadership in complex transformational environments. Most recently he was the Deputy CEO at Dawlance since February 2019 and has also been the CFO & Director Finance at Dawlance in the past. He holds a Master and a Bachelor degree from the London School of Economics and is a certified director.

BR Research recently had a detailed conversation with Mr. Khan; edited transcripts of which are produced below:

BR Research: How have things changed around Dawlance after its takeover by Arçelik A.S. Turkey in terms of product focus, sales & marketing, and distribution?

Umar Ahsan Khan: I think it has been a very exciting and fast paced journey that we have embarked on. Since the acquisition in November 2016, even though it has not even been a full 3 years yet, in many ways Dawlance is a whole new company. Being part of a global giant like Arçelik has opened up new avenues of growth, knowledge and opportunities.

Dawlance is a name that was always synonymous with reliability and quality. After the Arçelik takeover, our entire focus has been on three major areas: enhancing the safety culture at our factories; improving our product platform so as to enhance customer experience; and developing our employees and the workplace environment.

Our customer is central to all business decisions. The Dawlance promise of reliability permeates every action taken by us and it was for this reason that our immediate actions revolved around making improvements in our factories and our product design. At the same time, the challenge also remained to keep our prices low without compromising on quality.

Since the acquisition, not only did we enhance safety standards and productivity at our factories, we also expanded our product lines and tried to bring in an exciting combination of locally developed and imported products.

On the marketing side, we energised our media presence and through our ad campaigns, we have tried to bring our connect with our customers even close where we reinforce the fact that our promise of “reliability” to our customers now spans generations. In fact, thanks to product quality improvements, we have enhanced our warranty period for most products. These now extend up to 12 years in many cases while at the same time we continue to provide support through our 24 hour After Sales Service coverage.

BRR: How much has been injected in the company since the acquisition? What has it been used for?

UAK: You can imagine the level of commitment that Arçelik has made to Pakistan by the fact that since acquisition no dividend has been asked of us. On the contrary, over $60 million of Investments have been made at the factories and infrastructure. In addition to the safety and productivity improvements, I mentioned earlier, we have set up entire new production lines for making automatic washing machines and water dispensers. We have also improved our existing refrigerator and chest freezer models and introduced new models in all categories.

We are clear that only those manufacturers will survive in this market that has their own technology. For this purpose, we have enhanced our R&D infrastructure and now have state of the art product testing and development facilities, and this is an area we will continue to focus on keenly. We have also improved our packaging to ensure that despite the poor road infrastructure, our products reach our customers in perfect condition.

BRR: What kind of market structure do white goods have in Pakistan? What is Dawlance’s USP?

UAK: Unlike developed countries, we still have a long way to go as far as development of white goods market is concerned. Unfortunately, due to low consumer affordability, market penetration for white goods still remains very low, especially in the rural areas where at best families will either have only basic single tub washing machines or a small size refrigerator.

The other issue is the poor quality of products that are flooding the market. Exploiting consumer affordability, a number of players have flooded the market with cheap, poor quality products that are neither durable nor do they perform well under local conditions. As consumer education is low, unfortunately, it is our most vulnerable customer who is just entering the market that gets exploited the most with poor quality and sub-standard products.

As no mandatory safety or energy certifications have been put in place by the government, local manufacturers as well as importers have complete freedom to bring inappropriate products to the market. Ultimately, it is the consumer that suffers.

For the last over 30 years, Dawlance’s USP has been consistent. We endeavor to provide our customers with products that have been designed keeping in mind local conditions and cultural requirements. Our products will be “Reliable”, and we deliver this USP at an appropriate value that matches customer affordability.

BRR: What is Dawlance’s market share today? Can you give a breakup of the market share for different product categories like refrigerators, freezers, air conditioners etc.?

UAK: As you may be aware, there is no third party data available in respect of retail sales in the white goods sector in Pakistan. In addition, there is also a large quantum of grey channel products that are in the market whose import and sales are both undocumented.

Due to these limitations, we are constrained to work out the market estimates. However, I can confidently say that we dominate the refrigerator and microwave market while in respect of all other categories, such as deep freezers and air conditioners, we are in the top three.

We have now also introduced small domestic appliances and cooking solutions such as Hoods and Hobs and Built in Oven. I am confident that in the next few years you will see a sizeable presence by us in these categories as well.

BRR: How did the budgets fiscal measures affect your industry?

UAK: The major thrust of the government in the current budget has been to document the economy especially the small traders and retail sector. Broadening of the tax base is imperative for the economy and we are at a stage where there is no other option. The government has to enhance their revenue base as we - the documented corporate sector is already paying well over our due share. I believe the markets will recalibrate themselves and payment of tax shall be accepted as an inevitable cost of doing business and the markets will move on.

However, one disappointment that I felt in the budget was the fact that the government has removed the tax relief provided on investments in new plant and machinery. I strongly believe these needs to be re-examined and reinstated. What little revenue this action is generating for the government shall be more than eroded by the long term detrimental effect of reduced investment and plant modernisation.

BRR: The country is in austerity mode. How do you see the retail landscape changing in Pakistan?

UAK: It is an unfortunate situation, but I think it was necessary to take the steps that the government has taken for long term economic stability. Certainly, there is a pronounced change in the market and a drop in consumer spending on the back of reduced disposable income. However, you must realise that while market growth has slowed, there is little shrinkage. For the middle class consumer, refrigerators, washing machines and even one or two air conditioners in the house are not a luxury but a necessity. So even though these may be more expensive to buy for the customer, they will manage to make any necessary purchases that they require.

On the retail side, I think you will see consumers trying hard to find bargains. There will be much more comparison shopping and people will try to make full use of special offers or sales. IMTs and LMTs are proof of this phenomenon. They are in touch with consumer psyche and in line with expectations try to position themselves in a manner where they are seen to offer better value. Their market share will continue to grow as will online and e-commerce. We also see more off take through installment sales via banks and hire purchase dealers.

BRR: How hard will this stabilisation phase hit the middle class and the spending patterns for white goods? How do you see your volumes in the next three years?

UAK: I believe the next one and a half to two years will be difficult for everyone - not just the middle class. And after that the macro economic measures being taken by the government will start to pay dividends. Documentation of economy and broadening of tax base will be key to achieving this success.

A couple of changes in consumer spending behaviour will become very noticeable. Firstly, consumers will try to put off their spending decision until absolutely necessary; there will be little impulse buying. So the replacement cycle is extending and we are trying to support our customers by enhancing the effectiveness and efficiency of our after-sale service setup. Secondly, consumers will be in the market for bargains; basic no frill models and smaller sizes will sell more as consumers try to conserve cash.

To be honest, I am less worried about volumes as I am about ensuring that we are able to match our product offerings with the customers’ changing requirements that will be taking place as a result of the austerity. We are a young nation with 63 percent of our population under 25 years. New households will continue to be set up and market growth will happen albeit at a slower pace.

BRR: How much has cost of production risen for you following currency devaluation?

UAK: I think the effect has been significant as has been the case with all other industries in the country. We are reliant on imports for our raw material and the devaluation impact hits us directly as does the effect of rising energy costs. I think we can easily say that over the last two years our production costs have gone up by well over 40 percent. We have tried to take measures to keep the impact from being transferred to our customers through a combination of productivity enhancements and efficiency improvements. However, I believe now we are at a point where like other industries we have no choice but to pass on costs to the market.

BRR: Will you be able to pass on some of the increased costs to customers?

UAK: As I mentioned earlier, the consumer is going to be looking for value. Dawlance is uniquely positioned to offer its customers this value as we are the only appliance manufacturer that has an almost 40-year history of Pakistan operations. We understand the local market and its requirements and our products have been designed in line with these requirements. And now we are part of Arçelik and have access to their technology and R&D base, so we are improving upon this even further.

The reason why I am emphasising this is because going forward, the consumer will demand two things, value and reliability, and we are confident of delivering both. All our focus is to ensure the best possible consumer experience at an affordable price. If we are to offer this to our customers, passing on reasonable cost increases will not be an issue. Bottom-line is that the customer must understand that when they buy Dawlance, it is a purchase decision they can enjoy with ease of mind for years versus buying substandard products that will last a short period only.

BRR: Are there any white goods that are anti cyclical - that is they will continue to grow in volumes despite the hard economic times?

UAK: Yes, certainly. I see growth despite the challenging economic situation. As I said in the beginning, the market penetration for white goods in our country is quite low. Appliances considered necessary in the rest of the world are still luxuries here.

The younger generation has a very different way of thinking, and they allocate a significant value to their own time. Once they see that through the use of white goods the time saved on household chores would become available for other more value-added activities, they will keep adding these products to their households. I think we will continue to see growth in microwave ovens, washing machines including the automatic ones and all small domestic appliances.

BRR: How much of smuggling of white products into Pakistan an issue for you?

UAK: Unfortunately, like all corporates that are fully tax compliant, we are also affected by the grey economy. For us, it is less an issue of smuggling, although there is that as well. It is more of mis-declaration whether it is mis-declaration at the ports or in the form of under invoicing, in respect of sales tax non-compliance or understatement of income. While we are fully Sales and Income Tax and Custom Tariff compliant, if other entities are not, we are deprived of a level playing field and our competitiveness is hampered.

I assure you, not just us but all tax complaint corporates will welcome any move made by the government to bring the grey economy into the tax net. In fact, there are some categories that we are not operating in today - television to name an example - where due to the rampant smuggling; we just cannot enter the market as we would be unable to compete with the undocumented imports that are leaking through our borders.

BRR: Has there been any kind of Research and Development initiative taken up at Dawlance?

UAK: Absolutely. We are very focused on constantly improving our products. We need to ensure that any new development in the white goods market is also introduced and made available to our customers. At the same time, we understand we need to modify the product to make it suitable for the local market conditions.

We have developed state of the art testing labs and since acquisition by Arçelik, our research team size has increased manifold. And over the coming years, I am sure the Pakistan’s market will see the fruit of their labour. Already we have developed and introduced to the market, energy saving and low voltage solutions. You will see even more such offerings in the market that we hope the consumer shall also find exceptional.

BRR: We have seen the opening up of Arçelik’s first Dawlance store in Peshawar post acquisition. What is different about this store? Are there others in the offing?

UAK: The Mono Shop concept is to create a space for consumers to not just be able to see all Dawlance products under one roof but also experience their usage and see with their own eyes how the product shall perform in their own homes post purchase. This is a relatively common concept in the developed world however we were the first to bring it to Pakistan in home appliances. Now the prospective buyer gets a far more immersive feel of the product and is able to purchase with greater confidence.

This was getting more and more important to us because as our product range increases, even our mid-sized dealers find it difficult to be able to accommodate all our products in the same store, while product demonstration becomes even more of a challenge.

There is a plan in place and we intend to open other similar stores across the country with our partner dealers. You will hopefully be seeing these soon in all major metropolitan cities in the country.

BRR: With respect to dwindling FDI, what do you think are the key bottlenecks in Pakistan?

UAK: I think for the initial part of the decade, the issue was the law and order situation that we were facing as a nation. Alhamdulillah we have turned the corner on that challenge and foreign investors do not have that issue any more.

Now it is more a question of fiscal stability. Of course, the rapid devaluations and FX volatility will discourage potential investors as they will keep waiting for the rupee to bottom out before they make any investments else there is an erosion of value.

The other issue is that of the overall FX regime. The foreign investor needs to be confident that an investment into Pakistan is not a one-way street. They want full assurance that they will have access to a dividend stream that they can rely on flowing through unhindered. Right now, flow of funds is closely examined by the State Bank, and given our circumstances I understand that this is necessary. Unfortunately, foreign investors are not used to such extensive procedural oversight at least in the flow of funds.

Finally, all potential foreign investors require a settled taxation structure, we are still making far too many rapid changes in our tax and policy structure and that shakes their confidence.

BRR: Arçelik is the biggest Turkish investment in Pakistan. What other sectors do you believe have the potential to attract Turkish investors?

UAK: We are still a developing country and I think the value proposition we offer as a nation is unrivaled in the region. I think we remain extremely attractive in any area that has the potential to exploit our population base and growing middle class. Food, FMCG, housing and building materials as well as chemicals are sectors where I believe we have the ability to easily attract foreign players from Turkey and other countries.

BRR: What are your plans for Dawlance for the next five years?

UAK: I think we have immense potential. I see Dawlance as a platform where we are ready to deliver on the “Made in Pakistan” endeavor. Going forward I would like to see Dawlance become a regional exporter of White Goods. We not only have the will but also the ability to do so. In fact, we have already started enhancing our exports and have recently exported some units meeting European standards to our Parent company.

God willing with improved productivity at our end and hopefully some government encouragement we can become a serious contender in this market.