Money Matters

Old wine in a new bottle

Money Matters
By Hussain Ahmad Siddiqui
Mon, 07, 17

Pursuant to the Automotive Development Policy (ADP) 2016-21, the government has allowed four automakers, in partnership with local investors, to establish manufacturing and assembling facilities for production and marketing of passenger cars and commercial vehicles. These are Hyundai Motors of South Korea (Nishat Group), Kia Motors of South Korea (Lucky Cement Co) and the two Chinese companies in collaboration with United Motors and Regal Automobile Industries, under the Greenfield Investment category of the policy.

Many other prospective investors are in line to launch the assembly of the European cars and vehicles, such as Renault, Peugeot, Fiat, Volkswagen and Audi, as well as for revival of Nissan (Japan) project, subject to government approval to their proposals that are currently under evaluation. Renault of France plans to invest $100 million to set up an assembly/manufacturing plant to produce 50,000 cars annually, rolling out the first 6,000 units by 2018. Likewise, Premier Systems Pakistan will invest $30 million for assembly/production of Volkswagen and Audi cars, possibly using Ghandhara Nissan Karachi plant. A few of these investors will avail the concessions and facilities under the Brownfield Investment category.

Pakistan’s auto industry is well-established, though dominated by the Japanese carmakers like Toyota, Honda and Suzuki. It has shown sustained growth over a period of decades, whereas the domestic demand remained somewhat erratic. During fiscal year 2015-16 a total of about 218,000 local transport vehicles were sold compared to 181,145 units in 2014-15, registering a growth of over 20 percent in sales.

This however was a one-time phenomenon due to tens of thousands of vehicles sold under the Punjab government’s Rozgar Scheme.

The situation reversed during the last fiscal year (2016-17) as a total of 185,781 units were sold, recording a major decrease compared to 2015-16 sales and nominal increase over the 2014-15 sales.

The government however has projected a demand of 350,000 passenger cars and 79,000 light commercial vehicles by the year 2021, which may not prove to be realistic. Pakistan may be considered potentially attractive, though small market for automobiles in the wake of rising demand from the taxi market and the CPEC (China-Pakistan Economic Corridor) infrastructure development. Under this scenario, the key players in Pakistan ie Toyota, Honda and Suzuki also plan to increase their existing production capacity in coming years. It is ironical however that the existing production/assembly installed capacity remains significantly unutilised --- in the range of 48 percent to 64 percent except for the year 2015-16 that saw sudden increase in demand.

Today, production/assembly capacity of automobiles (including cars, vans, jeeps, pickups and LCVs) is 285,500 units annually, whereas production during the last five years was limited to about 210,000 units (in 2015-16), 185,000 (in 2014-15), 136,000 (in 2013-14), 137,000 (in 2012-13) and 175,500 (in 2011-12). The Policy has not proposed any measures to optimise the current installed capacity of automotive production, before planned gradual increase of capacity over a period of next four years.

Here, it is worth mentioning that the carmakers are not engaged in manufacturing activities in Pakistan through an integrated unit like in other neighbouring countries such as Thailand, Malaysia, Indonesia and India. Their facilities in Pakistan are simply stamping, welding, painting and assembly shops.

The assembly kits (CKD, completely-knocked-down modules) are imported, and a large number of parts and components, mostly low value-added and non-critical, are supplied by the indigenous vendors.

Local auxiliary industry, consisting of 375 manufacturers in the organised sector and another 1,600 in non-organised sector, produces and supplies some 50 percent to 70 percent (by weight, much less by value) of the parts used in these cars. Notwithstanding the fact that, from time to time, these carmakers introduce new models in Pakistan market resulting in achieving lower deletion (or indigenisation) for such models, and the carmakers are also allowed to import CBUs (completely-built-up units) for direct sales.

The regulatory and enforcement mechanism for quality, safety and environment standards remains ineffective. Unfortunately, the locally-assembled vehicles of all categories, despite not being at par with international standards, are substantially costlier  than in other countries, such as India, Malaysia, Thailand and Brazil, where these carmakers even have in-house facilities for manufacturing of parts, components and subassemblies. India manufactures engine, transmission, ignition system, clutch and braking system, windscreen and door glasses, whereas Pakistan is deprived of the same, courtesy myopic policies and vested interests that do not focus on real technology transfer.

The fact that the local car assemblers make huge profits at the cost of customers, which are amongst highest profits in their worldwide operations, is reflected in their declared profits for any year. For example, Toyota in Pakistan (Indus Motor Co) achieved net profit (after tax) of Rs 11.45 billion in 2015-16 and Rs 9.11 billion in 2014-15, meaning over 47 percent and 38 percent return on equity, respectively (sales also included imported CBU units during the corresponding years).  Evidently, the government has failed to protect customers’ interests.

Hyundai Nishat Motor (Private) Ltd will establish a production/assembly unit in Faisalabad for assembly and marketing of Hyundai cars, at an investment of $120 million. Likewise, Kia-Lucky Motors will invest $115 million to set-up facilities at Port Qasim Industrial Zone, Karachi to produce 25,000 Kia cars annually, scheduled from next year. United Motors (Private) Ltd, currently the manufacturers/assemblers of two-wheelers and three-wheelers at Lahore, have joint venture with Yangste Motor Group for pickups and Guangzhou Dayun Motorcycle for motorcycles. It is interesting that United Motors had started construction of their vehicles assembly plant on Multan Road in Lahore as early as in July last year. Another assembly plant in Lahore will be setup by Regal Automobile Industries Ltd to produce minivans and LCVs in collaboration with DFSK Motor Co (a subsidiary of Dongfeng Motors Corporation, China) and electric cars under agreement with Luoyang Dahe New Energy of China.

Interestingly, the Korea-based auto companies, which marketed their vehicles from 1999-00 to 2004-05 and then up to 2010-11, having closed down their operations do not have any customer-support available to the dismay of their users. Most of those companies vehicles are off-road now.

Therefore, these companies have lost market confidence in real earnest. Alas, the two Korean companies have now found new partners to avail, once again, the facilities and benefits permissible under the Auto Policy in vogue.

Shockingly, they have paid, in November 2014, an amount of $100 million in fines, with forfeiture of $200 million in carbon credits, for misleading customers about the fuel economy of more than a million cars sold in the US during the period 2011-2013. In July 2016, one of them was sued over engine failure in its three models sold in the US and Canada, after recall of 2,012 cars in September 2015. Again, in May 2017, both companies had to recall a combined 1.48 million vehicles in North America and South Korea over a defect that could cause engines to stall. In fact, the confidence and credence for these motors is at rock-bottom in Pakistan as the earlier one manufacturer was introduced in 1997. Orders were booked for 12,000 cars, and buyers paid, in advance, full payment for 700 units and 20 percent of price for the remaining units.

These cars were never delivered, and the individuals’ huge hard-earned money was allegedly misappropriated.

Subsequently, the Korean company decided to wrap up its operations in Pakistan without giving any compensation to its numerous prospective customers. It went bankrupt, and was taken over by another Korea-based company in December 1998. Later, it reappeared in Pakistan in 2005 with a new local partner - famous industrial group. On the other hand, the company’s Ukraine unit was liquidated in February 2010, and its proposed plant in India (in Tamil Nadu or Andhra Pradesh) costing over a billion dollar to manufacture 300,000 vehicles has not yet come up after its announcement about two years ago.

One wonders why such a tainted and financially weak company has been allowed to enter into the market under the 2016-21 Policy, while there are many other reliable brands willing to come to Pakistan. Intriguingly, such carmakers had the courage to make allegations against the officials of the Engineering Development Board (EDB), which has resulted in the government taking decision in haste to wind up the EDB; the regulator of the auto sector and responsible for implementing the policy.

Interestingly, the Auto Policy has no prequalification criteria set for the potential carmakers, whereas the previous policy had laid down minimum qualification of financial standing, experience and references in the export market for those investing in the auto sector. Thus, United Motors and Regal Automobile Industries have been allowed to assemble and market the unknown Chinese brands and models, some of which were introduced in China as late as in 2011 as their own brands. Reportedly, one of the new entrants from Lahore is planning to assemble Chinese car, which is the copy of Suzuki Mehran, 800cc car.  In addition, China’s JAC Motors will set up an auto plant in Punjab for the assembly of light-duty trucks, under the CPEC programme. There are already a large number of Chinese substandard vehicles introduced in local market, such as marketed by Sind Engineering, Master Motors Corp, New Allied Motors, Karakoram Motors and Alhaj FAW Motors, without proper after-sales support.

The car-assemblers are allowed import of CBUs (import of 100 vehicles of the same variant at half of the prevalent duties), and assembly through substantial imported/local components (CKD), and/or through substantial indigenised components, offering low tariff. Only time will tell how many carmakers are serious in their new ventures. Pakistan has been a dumping ground for a number of substandard imported cars since long. A host of car brands introduced in Pakistan, like Skoda, Citroen, Fiat, Renault, Mazda, Subaru, are not even remembered, whereas Nissan, Mitsubishi, are seldom seen on the roads. In 1997, Raja Motor Co/Raja Auto Cars imported hundreds of Fiat (Uno diesel) cars produced in Poland that were rejected there, under the garb of establishing assembly-cum-progressive manufacturing facilities at their Vespa scooter plant in Mirpur, AJK, which did not materialise.

In recent years, Nexus Motors were allowed assembly/manufacturing of Chevrolet (Optra) cars, initially using idle capacity of Ghandhara Nissan Limited plant at Port Qasim Karachi. The company sold hundreds of CBU cars (Optra, Joy and Spark) imported from South Korea under concessionary custom duty regime, and vanished from the scene within two years without starting any assembly activity. In fact, as many as four car assemblers ie Fiat, Hyundai, Nissan and Chevrolet have been closed down since 2007, as these were simply involved in trading activities. The indigenously designed and produced vehicles were discouraged by the government, and could not survive the competition with the giant global carmakers.

Pakistan had introduced car of its own in early 1970s, SKOPAK, in collaboration with Skoda. In late 1980s, Winmark International, Karachi designed an indigenous pickup and car known as Proficient. Adam Motors had launched Revo, a totally indigenous car in April 2005, but had to wind up its activities within one year of its operation, having sold some 600 cars deployed as taxis in Karachi. Indeed, the golden period for the local auto industry was before nationalisation of the industries in the Bhutto era (1971-77). Since 1950s, National Motors (Ghandhara Motors) were producing Vauxhall cars and Bedford trucks, Republic Motors (Haroon Industries) assembling Dodge motors, Awami Autos (Ali Autos) assembling Ford vehicles, scooters and commercial vehicles by Sind Engineering (Wazir Ali Industries), and the indigenous Nishan jeep was produced by Naya Daur Motors (Kandawala Industries).

The most damaging provision of the yester-years’ policy was to allow import of old used cars from Japan, which proved detrimental to growth of the indigenous automakers, but, sadly, it has been retained in the ADP 2016-17 as the Import Policy for Used Vehicles.

On the other hand, developing countries like India, Malaysia, Indonesia and Thailand have discouraged import of used vehicles from initial days, having ensured cent percent access of domestic market to local industry. Will the government authorities review the policy in the best national interest, instead of pursuing the all-time vested interests?

The writer is retired chairman of the State Engineering Corporation