Amidst the dark clouds of economic austerity, Pakistan's automotive industry is preparing for a makeover. Perhaps, of proportions the industry has not quite seen before. Over the years, many new players have thrown their hats in the ring vying for a spot on the big auto boys table only to be pushed out either because of poor government policies, inefficient local partners, or lackadaisical demand. Until now, under the Automotive Development Policy (ADP) 2016- 2021, at least three new global brands-KIA Motors with Lucky group, Hyundai with Nishat Group and Renault with Al Futtaim group- have set up local manufacturing operations in Pakistan. What will be the new dynamics when these players enter the market space? Where is the demand coming from? How effective is the ADP? To learn about this and more, BR Research sat down with Asif Rizvi, CEO of KIA Lucky Motors Pakistan for a candid chat.
Asif is an engineer and business graduate by profession. Over a vast career spanning 35 years, Asif has held leadership positions in multinational as well as local companies. In 1990 he joined Toyota Indus Motors and set up its production facilities. He became the President of an auto parts company in Canada in 2000 and nearly a decade later, joined as CEO of Thal Limited. A few years later, he additionally became the Vice-Chairman for the Automotive Group of the House of Habib overseeing a host of auto parts companies. He established a Joint Venture with a Japanese company Thal Boshoku and was its Chairman and CEO. In 2017, Asif joined KIA-Lucky Motors Pakistan as CEO. He is an MBA from the University of Minnesota and holds a Master in Mechanical Engineering from the University of Kentucky with a Bachelor from the NED University of Engineering and Technology Pakistan.
Edited excerpts from the interview follow:
BR Research: How did the KIA-Lucky partnership come about, and what motivated you to enter an industry that was for the longest time considered impenetrable?
Asif Rizvi: The Auto Development Policy (ADP) was announced in 2016. Before the policy was announced, discussions along the lines of expanding market players had been going on for several years. Finally, the government decided that in order to create a level playing field between new players and the existing ones, they should provide certain concessions.
Since the mid-1990s to mid-2000, the Pakistani automotive industry has not seen any big player enter the industry. There had been some, but on a small scale and for a limited time. The reason is that the auto players in Pakistan were so deeply entrenched that it was exceedingly difficult for anyone new to enter the market. They had a localisation cost advantage over any new player that could potentially venture into the business. So in order to encourage new players, the government had to introduce incentives. The new policy was very well received with 18 players, including greenfield and brownfield projects, poised to enter the arena.
Taking advantage of the ADP, the Younus Brother Group felt it was a good opportunity to diversify their portfolio. They felt that there was a business opportunity in this area which was being promoted by the government. On the consumer side, the automotive industry was severely dominated by a few players offering limited choices to the consumers. Each category of vehicle had only one or at most two players. Clearly, Pakistani consumers needed more products and choices. Not only that, but reputable international brands that they could choose from. Not only was this a good business opportunity, it was also a national project for the Group where the eventual beneficiary was the people of Pakistan who would benefit from new products and more choices. Plus, when there is competition, everybody improves, so we envisioned the quality of existing products and services improving as well. This was the courageous thought behind our entry into the automotive industry.
BRR: Where do you see the volumetric potential of the car market in Pakistan?
AR: To give you a perspective: in 2018, Pakistan sold about 330,000 cars and light commercial vehicles, which has dropped to 280,000 units this year. That means that 1.65 cars were sold per 1000 people in 2018. Globally, 97 million units were sold. The global average is 12.4 per 1000 people. If one applies that average to Pakistan, we should be selling 2.5 million cars every year, which after applying a correction for per capita incomes would be around 500,000 cars. We are selling much less.
Let's take another example. India is selling 4 cars per 1000 people. If we apply that ratio to Pakistan, and adjust for per capita, we again arrive at a figure of about 450,000 cars per year. Take yet another example, this time of Indonesia, whose population mirrors Pakistan. Nearly 12 years ago, Indonesia's per capita income was $1650 and the country sold 330,000 cars. In 2018, our per capita income was about the same and we sold the same number of cars. Now 12 years later, Indonesia sells 1.2 million cars. My analysis here is that, in 10 years' time, we should be selling at least a million cars.
BRR: Your analysis is based on the assumption that Pakistan's economy will grow as fast as the Indonesian economy did over the past decade. But given Pakistan's perennial economic crises and history of boom-bust cycles, isn't that a bit too optimistic?
AR: It is true, but I am hoping that Pakistan's per capita will also grow as much. Today, Indonesia's per capita is around $3800. We have similar population as well as demographics and the growth expectation from the current levels is not wildly improbable. Having said that, after witnessing this year's dip, I do believe it will take Pakistan another 4-5 years to get to 500,000 units. But the next half-a-million-unit mark will not be as difficult to attain because hopefully we will be on a growth trajectory by then. Right now, our installed capacity is 350,000 units but with the new offerings, it would be raised to 500,000. I think, we are looking at a phenomenal growth potential for Pakistan, given stability and some good luck.
Look, business decisions cannot be based on the 'dark side'. If we base all our business decisions on doom and gloom, then nobody would `join in. Why am I positive? Pakistan has a population of 220 million people with a 60 percent employable population which will be working, consuming and spending more. When their disposable incomes increase, the economic cycle will revive.
BRR: In the past we have witnessed automotive policies buckling under the pressure of targets and failing. The policies set tough targets for deletion which the automakers could not meet. To date, they are not as localised as they set out to be. What is different about the new policy?
AR: The current auto policy is self-driven. It is different from past policies when we used to base the auto policy on mandatory deletion. The past policies offered target-based concessions. Now it is a tariff-based system. We have no restrictions. There are two categories of automotive parts. The first category is parts that are localised and the second is parts that are not localised. The duty rates on the two are different and the gap between the two duty rates is 15 percent. In other words, if a manufacturer wishes to import a part that is deemed local, it has to pay a 15 percent penalty or surcharge. But they are allowed to import it. Deletion is now driven by economic exigencies. If it makes economic sense, an automaker can import or produce locally. It's a fairly good system and it seems to be working. Of course, like any other system, it can improve.
One factor that is not in the automotive policy today which is very restrictive to international brands is a volume correction for localisation. What the localisation policy says is that no matter how many vehicles you produce, the list of localised and non-localised parts is the same. That means, the policy is restricting global automakers who may want to come into Pakistan but make fewer cars. Obviously when an automaker comes in with low volumes, it cannot localise as much, and puts it to a cost disadvantage. The policy, however, has a frozen list of auto parts that will have to be localised to prevent the 15 percent penalty, whether the automaker is making low volumes or high volumes.
This is preventing low volumes entrants to come into the country and offering a wider selection to the consumers. In Vietnam, the market is much smaller but there are more brands and a better selection for the consumers, due to a favourable policy for the global brands.
BRR: The policy has garnered interest from European, Korean and Chinese automakers. Tell us about your MoU with French automaker Peugeot.
AR: We are looking at the Peugot brand as a possible entrant into Pakistan, which will be a paradigm change for the way auto business is being done in the country. In Pakistan, so far it has been one company, one brand; or one company, two self-owned brands. We will be the first company that plans to bring two vastly different brands-a Korean and a French -under one roof. It is a paradigm change-from being a single brand company, we can now have multi brand companies and we can have multi -brand dealerships. This also allows us to introduce a brand to the market which would typically not be able to introduce its models in Pakistan because of lower volumes. We will have higher combined volumes and better utilisation of plants. The auto landscape of the country will change completely.
BRR: Based on your market research, which segments do you see the highest growth potential in?
AR: From the local perspective, I see growth in the sector where there used to be a large number of imported vehicles, because that volume will get transferred locally. There were predominantly smaller cars imported, which will get replaced by local vehicles. Since the growth will be from the grassroots-with consumers moving up from not being able to afford a car to having enough disposable income to do so-more small cars will be sold.
This will be the biggest market, and this is where our 1000cc Picanto will be positioned.
Then we have witnessed the segment for mid-sized vehicles in the range of Rs 3.5-7 million, before devaluation, opening up. It is not a very high-volume segment but it is nevertheless open to us with the decline in the used and new CBU imported sector. Our offering in this open market space is the Sportage. The hallmark of this company will be its offerings. We are covering the width of the market with one car at the 2000cc level and another at the 1000cc level. Our market research identified these two spaces where there was a gap and a need.
BRR: There is an indirect restriction on used importer cars which has brought the incoming imported cars to a standstill. You intend on displacing some of that demand, but there is no guarantee that the policy would stay. Does your positive outlook account for that?
AR: In market driven economies, there are no guarantees, but it should stand to logic that if local car makers provide good quality models, variety, international specifications and good after-sale service; consumers would not want to buy used cars. When consumers buy a locally made car, spare parts are more readily available, after-sale services exist and there is a local presence of the brand that puts consumers at ease.
Not only are we offering a range of products, we are coming with a 4-year/100,000 km warranty with service stations all over Pakistan. This is a first and unprecedented for Pakistan.
BRR: People say car resale is one of the most important things consumers look at before buying a car. Is that still true-and if it is, will new untested players face problems there?
AR: I believe consumer behaviours are changing. What used to be important before such as resale or brand loyalty is not as important anymore. Today's car buyer is looking for innovative products, quality, specifications, features and most of all choice. He wants to have a range of options to choose from and for them the social media is very important, where global trends are easily factored in.
For KIA cars, I will say, for five years running, KIA has been ranked as No 1 JD Power's Initial Quality Survey mass produced car in the world based on their own internal inspection processes (JD Power is an American company that ranks vehicles manufactured globally). I do think that this is evident in changing consumer perceptions as well. Today Kia is the fastest growing brand in the top ten list of auto makers.
BRR: Over the past 18 months, car makers have dramatically raised prices. Consumers complain local cars are unaffordable. Do you think over time-with increased competition-local cars will become more affordable for the average Pakistani car buyer? Do you intend on competing with existing players on prices?
AR: No, we do not want to compete on price, and it is not the paramount factor. The single biggest factor that impacts price is volumes. If volumes increase, the constant value price of a car can go down.
The cost of producing a car depends on volumes which has an impact on price. At lower volumes, localisation is a challenge. Ultimately, localisation will remain the key for bringing prices down which can only be done as volumes go up, since the benefit of localisation is derived from volumes. The two have to go hand in hand.
For this, the government must provide a stable long term policy and base its tax decisions on increasing its revenue by earning less tax per unit on a much higher volume rather than higher tax per unit on a much smaller volume.
The former is beneficial for the exchequer as well as for employment and growth of the auto parts industry.