An interview with Dewan Muhammad Yousuf Farooqui, Managing Director, Dewan Mushtaq Group, Chief Executive, Dewan Farooq Motors.
Q. 1 Sir, your group is involved both in local assembly of vehicles as well as import of cars. What will be the impact of new policy, which may allow reduction in duty on imported cars, on local car assembly industry and the vendor industry?
A. 1 To answer to your question in totality, I will give you a description of Dewan Mushtaq Group's commitment to the Pakistani automobile industry, a brief account of automobile industry's history in Pakistan and repercussions of government interventions at regular intervals, and the possible fatal blow to the local automobile industry due to any change in government policy, specially regarding import of used cars is concerned.
Dewan Mushtaq Group entered the automobile industry of Pakistan in 1998 by signing Technical Collaboration Agreements with the Hyundai Motor Company and Kia Motors Corporation of the Republic of Korea. Our objective is to provide affordable and quality commuting solutions to all the segments of the Pakistani automobile market.
Unlike all the other major automobile assembly players in Pakistan, which are joint-ventures between the local sponsors and the Japanese Principals, Dewan Farooque Motors Limited has the distinction of being the 100% locally financed company. While our competitors enjoy the greater advantage of technical and financial support from their respective Principals, we have to totally rely on local finances and technical expertise to survive in the highly competitive local automobile scenario.
Our investment in setting-up the state-of-the-art plant for the assembly of Hyundai & Kia vehicles amounts to Rs 2.2 billion. Our plant provides employment to close to 750 rural families in Sujawal, Sindh. In addition to that, our head-office in Karachi and regional offices in Lahore and Islamabad provide employment opportunities to more than 200 families.
Last year, we entered into an agreement with the world-famous BMW group for import of their range of vehicles in Pakistan. For this purpose we have incorporated a company in the name of Dewan Motors (Private) Limited. Our investment in this company is around Rs 300 million to set-up 3S (Sales, Service and Spare Parts) facilities under one roof in major cities of Pakistan. We are also studying the possibilities to assemble these vehicles in Pakistan.
Recently, we have signed separate agreements for sole distribution and progressive manufacturing of Mitsubishi brand of vehicles with the Mitsubishi Motors Corporation. We have incorporated a new company in the name of Dewan Mushtaq Motor Company (Private) Limited for this purpose. We plan to invest more than Rs One billion in this project.
Dewan Motorcycles (Private) Limited is involved in progressive manufacture of 'Star' brand of motorcycles. Our motorcycles have provided an affordable option to the motorcycle customers with 70cc, 125cc and even higher capacity models targeted towards the sporting motorcycle customers. Within a short period of one year, we joined the ranks of the top three manufacturers in the two-wheeler market of Pakistan.
Delta Innovations (Private) Limited is yet another DMG project, manufacturing auto components for the local automobile industry. This is DMG's first step towards establishment of a vendor park to manufacture quality components for the local automobile industry.
This illustrates Dewan Mushtaq Group's tremendous confidence and commitment towards the Pakistani economy.
Coming to the second part; the Pakistan automobile industry is more than 50 years old. The first vehicle producers in the country were from UK and USA. From 1949 to 1970 as much as nine players in the private sector were involved in the assembly and/or distribution of vehicles including brands like Ford, General Motors and Toyota.
The history of the automobile industry shows a lack of progress when seen in the perspective of its seniority. Inconsistent policies over the five decades are a major reason for this slow growth. Under the Economic Reform Ordinance 1972, the Government nationalised all the nine automobile units in the country. A year later, in 1973, they were placed under the Pakistan Automobile Corporation (PACO).
The establishment of Pak Suzuki Motors in the early 80s laid the foundation of the current automobile industry and brought in investment and joint venture agreements. Then in the early 90s the automobile industry was privatised as a part of the Government's liberalisation plan of the national economy. This motivated the leading Japanese brands like Toyota, Honda and Nissan to set-up their assembly plants in Pakistan with huge domestic and foreign investments.
With Dewan Farooque Motors (DFML), the latest to arrive are the Korean cars in Pakistan; while maintaining the quality standards set by the Japanese assemblers offering higher value to the customers at an affordable price.
That is why DFML has, Alhamdolillah, managed to produce and sell more than 35,000 vehicles in just four years.
Under the supervision and guidance of the Engineering Development Board (EDB), the automobile industry has followed the aggressive deletion program.
This has resulted in development of more than 800 local vendors, out of which more than 250 vendors are manufacturing automobile components as per Japanese and Korean Original Equipment Manufacturers (OEM) standards. Today, the local vendors account for more than 70% of the components in case of 800cc passenger cars and more than 55% components in case of large passenger cars. This shows that the industry is moving towards self-reliance, and needs government attention and support in order to turn into.
Although the Pakistan Automobile Industry is more than five decades old, most of its years have been spent in a state of neglect. After the shock of the 70s nationalisation process wore off, the automobile industry suffered due to the Prime Minister's Transport Scheme in 1993.
The import of duty free cars through this scheme had a very negative impact on the industry. Due to easy availability and negligible paperwork, the scheme became very popular, however, was grossly abused.
The local industry, yet again, suffered the repercussions of government intervention with stagnant production and sales for the next eight years.
The automobile industry, even now, is in a difficult position. The recent demand-supply problem has made it a target of criticism from all walks of life. However this gap in the demand has risen due to the unprecedented annual growth rate of approximately 50% in demand for automobiles in the last two years.
This increase in demand has emanated from sharp decrease in the interest rates in the post 9/11 scenario, making the financing and leasing of cars much affordable at 7-8% per annum as compared to 25% just a couple of years ago.
With the lack of any profitable investment opportunities in other sectors, the investors have shifted their focus to other avenues like the stock markets, real estate business and the car booking business.
The automobile manufacturers, vendors, suppliers and dealers have made huge investments in the Pakistani economy, and provide employment to hundred of thousands of people in Pakistan, contributing towards the growth and prosperity of the Pakistani economy.
The industry was operating well below its installed capacity for the last decade, due to inconsistent government policies, especially the Prime Minister's Transport Scheme in 1993. The government should realise that plant capacities cannot be doubled overnight.
This short-term gap in the demand versus supply situation is being taken care of by the industry, which is operating at around 150% of its capacity. The local assemblers have started to invest in expansion of their plant capacities. New brands, like Mitsubishi, have been attracted towards the local assembly.
However, the investor confidence has been shaken due to government announcements regarding permission to import used cars and reduction in duties for imported cars.
A wrong decision at this critical juncture, when the industry has started to respond, will be fatal for the fastest growing industry of Pakistan.
Q.2 The Prime Minister and Federal Minister for Industries are emphasising that the local assemblers of cars should reduce their products prices. What are your views on that?
A.2 The local automobile industry is operating in a highly competitive environment. The advent of Korean vehicles especially the Hyundai Santro and Hyundai Shehzore, brought about a price war situation three to four years ago, forcing the Japanese assemblers to reduce their prices.
As explained earlier, 50-70% of the components are being sourced locally. However, due to relatively small size of the market, the resultant per unit cost becomes high.
At present, the size of passenger cars and Light Commercial Vehicles industry is around 90,000 units per annum. Our industry is relatively small when compared with other Asian economies of India and Thailand operating at more than 700,000 units per annum.
These economies are not only 90% self-sufficient, but are also turning into a major source of supply of automobiles to rest of the world. Even today, these economies have a preferential customs duty regime to protect their local industry, giving an average duty advantage of 50-60% to CKD versus the CBU vehicles.
Once our passenger cars and light commercial vehicles market is able to cross the 500,000 units/annum mark, our products will also become internationally competitive, bringing down the cost of local components to a great extent.
Let me assure that a consistent automobile policy creating and encouraging an investment scenario will most definitely result in customer benefit with improved quality and most competitive prices.
Q.3 What is the total market of cars and motorcycles in the country? How do you see the future demand of locally manufactured cars and motorcycles?
A.3 Total market size in the calendar year 2003 was 352,364 units; consisting of 80,368 passenger cars 12,757 Light Commercial Vehicles, 3,211 trucks and buses, 32,726 tractors and 222,673 motorcycles. This is an overall 53% growth over a total of 230,585 units for the calendar year 2002. The passenger cars segment experienced the highest growth rate of 69% in the same period, followed by 58% growth rate of motorcycles.
The passenger cars and Light Commercial Vehicles segment is expected to touch the 110,000 units mark in the current calendar year.
Given a consistent government policy, the automobile industry is expected to outperform the GDP growth rate of the country for years to come.
Q.4 What are your future plans to introduce new models of cars and motorcycles?
A.4 As explained earlier, the mission of Dewan Mushtaq Group, Automotive Operations, is to provide quality and affordable commuting solutions to the Pakistani market.
Ever since its appearance on the automobile arena, DFML has proved to be an agent of change in the previously dormant automobile market dominated by Japanese brands. DFML brought about a healthy competition in the market by introducing six new products in every segment of the market. The well-established Japanese assemblers had to react to the changed market scenario by bringing in new models.
This is a direct reaction of aggressive marketing strategy of Dewan Farooque Motors, which has benefited the Pakistani customers in the shape of better product offerings, and higher value for their money.
Our Star Motorcycles have provided healthy competition to the motorcycles market in Pakistan. We are offering quality two-wheelers at half the prices to that of the Japanese brands.
We are the first one to provide sport bikes in Pakistan.
In the coming years, as well, you will see some very exciting and world-renowned products from DMG offering the best value for money to the Pakistani market.
Q.5 What gives an edge to your motorcycles over the available range in the market?
A. 5 Star Motorcycles are quality motorbikes being assembled in Pakistan, and marketed at two-thirds-the-price to that of the Japanese brands. We offer bikes in the range of 70cc, 125cc and larger engine cruisers as well. We are the first one to provide cruisers in Pakistan.
Q. 6 What are your plans to increase your production capacity?
A. 6 At present, the capacity of DFML plant is 10,000 units per annum based on single-shift basis. In order to meet the market demand for different models, currently we are operating at about 150% of our capacity, and are working on extended shift basis. As the demand for our products and number of models being offered increases, we will go onto the double shift.
Once we achieve full capacity on double-shift basis, only then can we go on to extending our plant capacity.
Q. 7 You have recently introduced BMW and Mitsubishi in Pakistan. What is the response?
A. 7 BMW and Mitsubishi are world-renowned brands offering exciting and quality products catering to the motoring needs of different target markets.
As far as BMW is concerned, their products are targeted towards the higher end of the market, which is very much limited in Pakistan. The market has responded very positively, much beyond our expectations, after the launch event in Karachi earlier this year. We aim to provide quality sales and after-sales solutions to our BMW customers, and plan to become the market leader in this segment.
Mitsubishi is targeted towards the mass market segments. Mitsubishi was a major player in 1980s and early 1990s. However, due to lack of any CKD operations, Mitsubishi lost its share in the Pakistani market. Now that we have signed separate agreements for the sole distribution and progressive manufacturing of Mitsubishi vehicles with Mitsubishi Motors Corporation, we plan to offer a full range of Mitsubishi passenger cars, Light Commercial vehicles and Sport Utility Vehicles to the Pakistani market. People are anxiously waiting for a quality option offering exciting products.
Q. 8 Any thing you want to add?
A. 8 I would like to reiterate my viewpoint regarding the need for a consistent and positive Government policy and outlook on the automobile industry of Pakistan. This industry is still in its formative stage, and needs government support and patronage. The current gap in demand and supply of vehicles is a short-term one, and the automobile assemblers and vendors are preparing themselves to cater to the growing needs of the Pakistani market.
Instead of taking any drastic decision against the industry at this critical juncture, the government should give protection to the local industry, and create an investment friendly environment.
This will result in restoration of local investors' confidence which, in turn, will attract more domestic and foreign investments into different segments of the Pakistani economy.
At present, there are 6 cars/1000 persons in Pakistan, which is well below the world average of 120 cars/1000 persons. Once the local industry reaches the 500,000 units per annum mark, it will start giving results in the form of cost-effective local components resulting in most competitive product prices.