The automotive industry is considered to be the backbone of any manufacturing economy, providing millions of direct and indirect jobs. In Pakistan, the sector has been dominated by three major players of which Indus Motor Company in partnership with the Japanese giant Toyota needs no introduction. The company's flagship Corolla is considered to be one of the most popular cars in the country and has maintained that status through the years.
BR Research recently had an opportunity to sit down with the CEO of Indus Motors, Ali Asghar Jamali, at their facilities in Port Qasim, Karachi. Jamali took over as Chief Executive from his predecessor just last year but has been working in the company for over 17 years. He is a fellow of the Institute of Chartered Accountants of Pakistan and has attended management programs at Harvard University and Wharton School of Business, USA.
Within the context of the new auto policy, Jamali talks about the prospects of the automotive industry as new players venture in, the ensuing competition, IMC's upcoming plans, and what should happen to used cars. Here are edited transcripts of our conversation.
BR Research: Let's start by telling us about your latest expansion and what it entails.
Ali Asghar Jamali: We have already invested about Rs 4 billion into our plant to remove bottlenecks and increase capacity of our paint shop. This would come into effect in 2QCY18 and we would be able to increase the production capacity.
But it's not that we have not been increasing capacity. We have been periodically doing that. When I joined, we were producing 20 cars a day; today we are producing 240 cars a day, and going forward, it will go up to 270-280 cars a day.
BRR: What do you think is the demand-supply gap right now in the car market, say for Corolla?
AAJ: You cannot give a true estimation of the demand-supply gap and I'll tell you why-the reason is very important. Pakistan is a market where we have this menace of the "investor element". If this element wasn't there, I would be able to tell you the number of customers that are waiting for a car and that would be the gap.
See, the availability of the vehicle is there in the market. You can go to the market and buy a car right now, the availability is there. But these investors are charging extra money to sell the cars. They create an artificial shortage in the market by buying them in bulk. We have been fighting the investor element day in and day out, and you would have seen that we refunded thousands of vehicles of these investors to curb these systems. I would say, the demand-supply gap does exist, but it is not huge.
BRR: So what is your estimation of the organic demand in the market for cars spread across different variants?
AAJ: The market has been growing, which is a great sign. The current size of the market is around 330,000-340,000 units for the whole automobile sector. A Japanese company conducted a survey and found that by 2025, Pakistan market will grow to 500,000 units.
I personally believe this could be achieved earlier. I feel by 2022-23 we should be hitting 500,000. But Pakistani market has always been a bit like a rollercoaster. Dips can come in for a variety of reasons including political uncertainty and the economic situation.
Which segments we will see this growth will be interesting. Pakistani automotive market is very different. Most markets are like a pyramid, but ours operates in a rectangle. All segments have similar market share. As market grows, I see it squeezing toward becoming a pyramid; smaller cars will have higher demand and so on.
BRR: What are your current localisation levels for each of your variants?
AAJ: I can tell you, we buy more local parts than we import. More than 64 percent - for Corolla, for instance, we buy locally. And it's different from model to model and it is all based on volumes. For Fortuner and Hilux, it is less localization because of lower volumes. Automobiles are a very capital-intensive industry, so each model change requires heavy investment. Investment for a new model for Corolla for example would come up to $100 million. And you need volume to justify such investments. Moreover, the lower the volume, the more difficult it is to localise.
BRR: But that is one of the major criticisms of the industry-that local automakers have not invested, and as a result have not grown to scale and managed to localise more.
AAJ: Look at the economics of it. If it is cheaper to buy from outside, why would you localise? You will only localise if it makes economic sense. That's the first point. But that also is a misnomer because localisation levels are pretty high in the country. Both Suzuki and Honda have localised. In Corolla, the whole body is localised. Anything that you can touch in that car is made in Pakistan. Every day, we buy 126 million parts from Pakistan. The technology transfer that has happened, and the jobs that we have created have not been acknowledged.
Our parts are not only coming from abroad in Completely Knocked Down (CKD) form from Thailand, Japan, Philippines, Malaysia that make up the imported content; but from all across Pakistan. Our parts come from vendors from Karachi, Lahore, Islamabad, Gujranwala and we bring all these parts together, which is how we build a vehicle.
Whatever you can make here, you make here. Whatever you cannot make here, you won't make here. There will be some parts that you will never localise in Pakistan. If some vendor is making millions of parts abroad and they have a highly functional level and it's cheaper, it doesn't make logical sense to localise that part.
BRR: Say, you were to grow your volumes to 500,000 or more, then wouldn't it make economic sense to localise here because cost per unit would decrease with volumes. In turn you would create more jobs as the market size grows.
AAJ: Yes, but there are a few parts that are model specific that we import. These are highly functional parts. Plus, that volume of 500,000 that you have mentioned will not be for one model.
BRR: Why are car prices in Pakistan high compared to other countries and what's the best way to bring them down to make them more affordable?
AAJ: Car prices are not high. Pakistan is on a tariff based system. In a vehicle, 33 percent of our price is composed of government taxes which include custom duties, income tax and sales tax. If you remove that, you would find that we produce the cheapest cars.
Today we are producing the world's cheapest Corolla. Remove the taxes and duties and convert it into dollars, today's Corolla has more specs, has a better engine and is the cheapest in the world. Compare it to any market. In fact, we are the fourth largest Corolla producer and seller in the world. There are 53 plants of Toyota, and there are over 150 countries in the world selling Toyota vehicles -we are the 4th highest Corolla selling nation worldwide, and first in the Asia Pacific for the past seven years. People get amazed when they hear this.
BRR: But prices for end-users are still high, even for small cars. For consumers, wouldn't it makes more economic sense to buy a Daihatsu Mira, which is a three-year old used imported car than a local car like Mehran that is only marginally cheaper but far inferior in quality?
AAJ: People buy used cars for two reasons. One is that they need choices. Second is the spec. And the price may seem cheaper but it is because the government is subsidizing it. The duties on the imports of these cars are fixed. And these duties are depreciated. So, a Wagan-R gives more duties and taxes than a used car. Now if you ask me, the subsidy that is given to used cars should be given to new manufacturers.
BRR: What then about choice and variety of models?
AAJ: With the new auto policy, new players will come in. One manufacturer cannot give you all the choices. We are giving choices in Corolla, starting from 1.3L to 1.8L. We give a commercial vehicle, and a SUV. Suzuki is giving small cars. Honda is giving sedan and has come up with a Multi-Purpose Vehicle (MPV). New players will come in and they will bring in different vehicles, so there will be more to choose from.
BRR: Currently used cars are coming through schemes. Do you think for the sake of greater competition, they should be allowed commercially? What is your view on used cars?
AAJ: Right now, used cars is all what the government has, because it provides people with more choice. But with the new auto players coming in, the government will have to rethink because we have to ask, what does this country need? We need jobs, we need to save foreign exchange and we need duties and taxes.
Will used cars create jobs? No, but we do. We have 3000 plus people working here and when we buy 126 million parts from local vendors every day, we create livelihood for over 3-4 million families, which include all the manufacturers, vendors, and the dealers. There is a whole network.
Secondly, we are an importing country so we need to reduce our import bill. Importing a CKD versus a full car saves on foreign exchange. Thirdly, you will be able to provide more duties and taxes as manufacturers. Now the fourth reason is very important. How do economies grow, and do used cars contribute to this growth?
You import a used car, which is a transaction between a businessman importing a car and reselling it. He makes money. On the other hand, when we sell a car, for all the parts that we are buying-there are over 46 vendors who make money and pay salaries to thousands of people. These vendors work with tier-two vendors who also make some money that generates income for other people. Then our dealers earn something off of selling. This is what you call the flow of money. In our case, the exchange of transactions goes in thousands, so the distribution is more than a used car distribution.
In fact, we don't make cars, we make people. We train people who go on to work abroad, and then remit money back home. It's not just the contribution that we do to create jobs, or paying to the exchequer, but the remittance our people send when they go abroad to work. This is a major source to finance our current account deficit.
In essence, you have to see it from a bigger prospective. This is how growth happens, and this is what our contribution is.
BRR: Do you see IMC and other players face tough competition from the new auto ventures that are upcoming?
AAJ: Competition is always good. Today our products and services are compared with those that are not available till yet. If new entrants are there, only then comparison can be made between our products and services. Whatever model's new entrants will bring, the consumer will compare it with ours and conclude. If we require any improvement, we have a network, and teams in place who are adaptable. This will give us a chance for further improvement.
BRR: Do you agree that small cars are where the Pakistani market is headed and if so, why isn't any new player bringing small cars? Why aren't you; especially since Daihatsu was completely acquired by Toyota globally?
AAJ: I think right now new players are in the study phase, so I cannot say what they are bringing. It could be small cars, or not. But like I explained earlier, the market has to be a pyramid. Even in used cars, more than 56 percent are in the small-car category, so obviously people do want more choices there. We will have to wait and see.
As for us, it was Daihatsu's corporate strategy to move out of all countries so Cuore had to go. Toyota is a global company and they have their own priorities. For them, there is the whole world, Pakistan is just one country. They are coming up with their strategy and once they finalise that; then we will go into discussion with them.
BRR: Do you have any vendor development programs and do you help your vendors and small auto parts manufacturers to attain bank financing since formal financing is so difficult to attain for SMEs?
AAJ: We have a department consisting of 60 people that deal with our network of about 46 vendors. There is transfer of technology, and then we try to transfer what we learn from Toyota. In that sense, there is a constant development and technology transfer.
Usually, vendors do their financing themselves, but if they have an issue, and if it's a good vendor, we provide them with the support.
BRR: What's a good vendor to you? Is it based on size?
AAJ: Size of the vendor does not matter. What matters is the attitude of the vendor, and the quality of the product that they manufacture and then how well they follow the Toyota systems.