Hilal Khan Afridi is the young CEO of Al-Haj FAW Motors (AHFML) since 2006 when the company was first incorporated in Pakistan. AHFML is part of the Al-Haj group with a variety of business segments already in operation including logistics, transportation, auto assembly, parts and textile manufacturing.

Hilal sat down with BR Research for a chat and had a lot to say about the prospects of the auto sector, particularly his positive outlook for the trucking segment; the auto policy; upcoming highlight for FAW's business in Pakistan; and the future of passenger cars. Here is an edited transcript of his meeting with us.

<B>BR Research: Give us a background of FAW and how it came about.</B>

<B>Hilal Khan:</B> The company was registered in 2006 and we started by importing Completely Built-Up Units (CBUs) from China, starting with heavy duty and prime movers. Later in 2010, we increased our product range for commercial vehicles and also introduced medium duty versions. In 2011, after a good market response for heavy commercial vehicles, we decided to go into local production of again heavy duty and medium duty trucks.

To give you a little background of FAW China: it is the biggest and the oldest automobile group of China, which is state-owned and they have been producing trucks and cars since 1953. Later, they had joint ventures with international brands such as Volkswagen and Audi. Currently, they have joint ventures with Toyota, Mazda, and General Motors. They have collaborations with all the three big auto producing markets: America, Germany, and Japan. These helped FAW introduce new technology for the domestic market and themselves to the international markets.

<B>BRR: So how did you bring FAW to Pakistan?</B>

<B>HK:</B> In early 2000s, we saw a boom in the automobile sector, not in terms of small vehicles but in terms of commercial vehicles. Al-Hajj group has a background of logistics business, and we were gaining interest in the trucking sector because we had good relations with logistics and oil marketing companies (OMC). We have contracts with all leading OMCs such as Shell, PSO, Total, Caltex, Chevron, so that experience helped us. And when the trucking market started expanding, we thought it was the right time to introduce new truck brands other than the available Japanese such as Hino and Nissan.

In 2004 we approached Chinese companies and it took us a couple of years to select FAW. We thought FAW was the best amongst all the Chinese truck manufactures. So we signed an agreement with them and imported our first consignment in 2006. By 2009, we increased the product range to prime movers, dumpers, and also rigid trucks.

In 2010, we recorded our highest sales while doing CBU business. At that time, we were only selling to the private organisations and no government contracts, since government only buys locally produced products. With that opportunity in mind, we started production of these trucks locally to increase our market. In 2011, we were able to assemble these trucks here in Pakistan. Our assembly plant is located at main National Highway.

I would like to mention here that we were the first company that got registered with the government of Pakistan as a new entrant under the first Auto Industry Development Policy 2007. We didn't get a lot of incentives like the current auto policy offers, but they gave us a grace period of localisation. We started local production but unfortunately, the country's economic situation plummeted around that time and demand for trucks went down. By 2012, the market size for trucks shrank by around 200 percent.

The overall auto industry was suffering but the poor economic growth hit the trucking sector most. From 4,500 of annual sales, it came to 1,700. That put us under pressure and we introduced small vehicle passenger cars to make our own investment feasible. So we introduced a seven-seater van and one-ton pickup and imported them for six months, and then started assembling them locally.

<B>BRR: Where is your demand coming from?</B>

<B>HK:</B> FAW was the first Chinese truck introduced in Pakistan and despite having good relations with OMCs and logistic companies; we faced a lot of issues. The plan was to somehow put these vehicles on roads, so we sold these vehicles on credit. Plus, our pricing was 20-25 percent lower compared to Japanese trucks, which helped us convince customers.

Our main customers are oil and fuel transporters: petrol, diesel, furnace oil, and food oil. Then dry cargo, which includes transportation of containers from KPT to other parts of the country, and also dry bulk cargo: coal, wheat, and other products.

The trucking sector has a combination of small individual transporters and corporate customers and there is hardly anyone who has not bought our trucks - be it Agility, PTN, ITC, Amiza Transport, etc.

In the government sector also, we have sold a lot of units of trucks as well as vans and pickups. We are now the biggest supplier for the Waste Management Companies in Punjab. We have supplied vehicles to almost 12 municipal cities. Big dumpers cannot go for garbage collection in cities so we offered to make small dumpers for them that could go through narrow roads and alleys.

We have also sold to FWO, PEPCO, OGDCL, WAPDA, Sui gas, and also military organisations.

We also have plans to provide complete solutions to trailer manufacturers by setting up a trailer and tank manufacturing plant, producing the engine part; prime mover, as well as the trailer part, which can be oil tanker trailer, dry cargo trailer, or gas trailer.

<B>BRR: What is your plant capacity and production currently?</B>

<B>HK:</B> It is about 15,000 units a year but currently we are going into expansion and by end of this year, the production capacity would reach 20,000. The increase in facility is due to our plans to produce new models. We are producing 1,000 units (+- 5 percent) with 20 percent of the truck market share currently, which used to be 30 percent at a time. But due to some Chinese competitors such as Ghandhara's Dongfeng brand and Dysin's Sino trucks, it has fallen.

They both have given us good competition. It made us aware of our weaknesses so sometimes competition is good.

Then, we are producing 3,500 units of van and pickups per annum. Monthly average is about 300. Our pickup is a one-ton capacity with a bigger deck size compared to Suzuki. And since we have more production capacity, we are working on the local production of V2 car by December 2016. We introduced it in 2015 by importing it and found a demand for it so now we will produce it also.

It is a big engine: 1.3L but the car is small in size (same as Swift or Vitz but bigger than WagonR and Cultus) and competes with multiple products from Suzuki. Currently we are selling it in 1.3L engine but we plan to launch 1000 cc locally, so we will have two variants.

<B>BRR: Can you not make the cars in your existing capacity?</B>

<B>HK:</B> We can but in our plans for the next two years, our van pickup sales will likely go to 600 per month, from the current 300. And at the same time, by end of 2017, the first year when V2 will be locally produced, we expect to reach 500 units a month. That would make 1,100 units a month and the total volume of around 13,000-14,000 a year and therefore capacity enhancement.

But obviously, not a lot of auto companies are running at 100 percent capacity. For instance, Honda's capacity is about 30,000. But they produce 20,000. You keep a certain space for yourself.

<B.BRR: What is your products' unique selling point?</B>

<B.HK:</B> I would say the price. Price, because we are offering 1.3L engine which is far more powerful and we are offering AVS brakes, dual airbags, power steering, power windows, and better mileage.

<B>BRR: In Pakistan, we buy a car and are already thinking about its resale value. How do you beat that perception?</B>

<B>HK:</B> We beat that perception by selling more. The more you sell the better resale you get. The cars that have better resale are not because of the quality but because there are far more units sold. So there is availability of spare parts, the know-how of the product by the roadside mechanics.
We have a very good example of Toyota Corolla and Honda Civic. Everyone knows Civic is a better product in terms of quality, but Toyota Corolla sells more and so it has a better resale value.
That is why we want to introduce 1000cc and 1300cc; so that our V2 is sold to every corner of Pakistan.

Our product is dual-purposed and will be used in cities as well as for highway drives. It will run in mountainous regions; and Potohar region starting from Hazara till Mianwali. Our highest V2 sale is in Islamabad because people travel to northern areas.

And in my opinion, in Pakistan, such a product is in dearth. And such a product in Pakistan has never been marketed. Swift is the exact product that I'm talking about but Suzuki never marketed it correctly. There are couple of technical problems with it such as fuel consumption, but it could have been marketed better.

<B>BRR: Is V2 more fuel efficient than other cars?</B>

<B>HK:</B> It is probably the most fuel efficient 1.3L car available on Pakistani roads. The current city average is about 15-16km, and on highways it reaches 18km.

<B>BRR: Do trucks take the bigger share of the pie in your production?</B>

<B>HK:</B> In value, not in volume. The better profit ratio is for trucks but gradually, with localisation we have improved our profitability. We have achieved about 25 percent localisation in parts in pickups. In trucks, it's about 7-8 percent.

<B>BRR: What are your localisation targets?</B>

<B>HK:</B> We don't have any but government has given us targets usually based on precedence set by the previous manufacturer of the same variant; 39 percent and 35 percent localisation is mandatory placed by EDB.

<B>BRR: What's your top line?</B>

<B>HK:</B> I can tell you that year-on-year, our growth for trucks has been 60 percent for several years but it has decreased since we got competition from the new Chinese brands. In vans and pick-ups, we saw growth of 110 percent recently.

<B>BRR: What do you think about the new auto policy and do you think used cars should be commercialised?</B>

<B>HK:</B> I have high hopes with the policy; it is good in terms of new brands in Pakistan. It'd be nice if there are 3-4 new brands in the market within the five-year program. There can be some improvements but by and large, it's good since its investment and customer friendly. And this was the need of the time. But there are incentives that the auto policy could give that investors would jump on but they didn't. In South Africa, they give incentives like free electricity for two years or provide land.

Used cars are coming in without any restriction through expatriate's passports and it's destroying the local industry. As an auto manufacturer, no it shouldn't be commercialised. You know, Pakistan is the only country in the world where local production of cars exists side by side with the import of used car. Yes, brand new CBUs can be brought in, but used cars should not be allowed. Government says it wants to break the monopoly but you can't do that with used cars.

<B>BRR: So how do we break the monopoly then?</B>

<B>HK:</B> Right now, trucks market is 4,500 and there are eight producers (Hino, Isuzu, Dongfeng, Nissan, Daewoo, Sino truck, Mitsubishi, and FAW), while cars are 200,000 and producers only three. So in trucks, there is competition, price war, and quality wars. But not in cars. Corolla has a segment that nobody can touch. Suzuki has a market. So we need more competition.

You break the monopoly by giving better incentives (duty concessions etc.) to fast set up new plants. We were the entrant from the first auto policy; the government should make sure that projects like ours are successful because if we are successful, in the next few years, more companies can come in.

Another aspect is that import of used cars is usually an illicit business. They are coming on passports of expatriates who are not taxpayers. And the markets they sell in (on Khalid Bin Walid road, Jamshed Road, Jail road in Lahore, and Islamabad has a few markets also), none of these are registered. So in that way, commercialising would be good but then you destroy the local industry. That's the trade-off. You have to make that decision. Over 500,000 people have lost their jobs in the auto industry due to this.

We have to a great extent broken Suzuki's monopoly in vans and pickups. In the corporate sector, their first preference is FAW rather than Suzuki. The Ravi/ Bolan are not Japanese quality anymore; its quality has deteriorated so much, and that's where we have come in.

<B>BRR: Moving to localisation, it took Suzuki 25 years to come to 65 percent localisation, producing around 100,000 units now. How many units will Pakistan produce to reach 100 percent localisation?</B>

<B>HK:</B> Hundred percent is not possible. It is possible that they made a policy in which we worked with the government. When Japan became expensive in late 1990s, they had to start producing it outside Japan. They had choices of Thailand, Indonesia, Pakistan, and some African country.

Thailand's government gave the best policy, so they moved. Pakistan lost because of the socio-political situation even though we had a better engineering base. But Thailand's policy convinced the Japanese to go there. Now Thailand is producing nearly three million vehicles out of which two million are exported.

The Corolla that is coming to Pakistan is coming from Thailand, not Japan. Honda Civic, Hino parts are all coming from Thailand. If Japan was sending Corolla's parts, the car's prices would sky rocket.

<B>BRR: Where do you see demand for commercial vehicles going at the back of CPEC?</B>

<B>HK:</B> Some numbers say that when CPEC starts, about 150,000 trucks will be entering Pakistani roads from China. And they won't be only Chinese trucks. It's very likely that all trucks will shift to Pakistani trucks once they reach here because of the left/ right-hand driving.

If CPEC really gets realised, we are talking about trucking industry's growth of about 300-400 percent from current volumes. In the next 10 years, we will see at least 20,000 trucks. Even if CPEC doesn't happen, and if they improve the economy a little better, there has been some improvement - from 2000, trucks we have reached 4,500 - so I see at least a 100 percent increase, at least 10,000 trucks.

It will get better if we remove old cars, old trucks and the resale phenomenon. If that happens, we can see a 100 percent increase in the next 12 months.

The taxi stops you see from Karachi to Hyderabad, they are all old cars. In KP, Mehran is used for 10 years by private individuals, and then the car is used as a taxi. The same way, if you look at trucking, the life of a truck is so long; from running it for 4-5 years on larger routes, to selling it for shorter distances (200km). Then resale for 50km drives, then resale it to transporting goods from Port Qasim to SITE, then they are used as water tankers. Even after that, they would somehow use it for something or the other. If you stop at the third stage, markets will have to provide new ones. The only way this cycle can end is if there is more competition in the market. If we sell 500 V2 cars, you would see that Alto resale would stop. If Nissan Sunny comes in competition with Corolla, its resale would end.

<B>BRR: Why are you not a member of PAMA?</B>

<B>HK:</B> PAMA is predominantly a Japanese association and you can say that we are not very comfortable with them. We don't think they work tirelessly for the automobile sector. PAMA is controlled by three companies: Hino, Indus, and Suzuki. There aren't many Chinese brands except maybe Qinchi.

<B>BRR: Do you plan to list?</B>

<B>HK:</B> No plans yet. I can tell you that we have signed a MoU with FAW in February 2016 for a joint venture where FAW will be investing in our company and would get a certain share in the company. And this investment will be part of CPEC.