INDUSTRY PRESENTATION

AUTOMOBILE SECTOR OF PAKISTAN

 FEW IMPORTANT TERMS.
CBU: (Completely Built Unit) This means that the whole
vehicle has been assembled in some other country and then
imported to the country.

CKD: (Completely Knocked Down) The parts of such vehicles

are imported but the vehicle is assembled in the country.

SKD: (Small Knocked Down) The parts of such vehicles are

imported and a portion of the vehicle is assembled in the
country. i.e Some sophisticated components are not
assembled within the country

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 Industry Snapshot
• Total investment of Rs.129 billion( Cars, SUVs, Motorcycles,
Tractors)
• Direct employment in the sector is over 192,000
• Contributes more than $3.6 billion to the economy
• Import substitution resulting in annual foreign exchange
savings of over $ 1 billion
• Industry is the second large tax payer in terms of custom duty ,
sales tax and WH tax

Source: Engineering Development Board

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 SEGMENTS OF PAKISTAN AUTO INDUSTRY

Cars and Light Commercial Vehicles (LCVs)

Two and Three Wheelers

Tractors

Trucks and Buses

Vendor Industry

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 Operational Environment
• Industry operates under franchise and
technical collaboration agreement with:
– Japan
– Europe
– Korea
– China

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 Production Process

• Completely Knock Down Units (CKDs) are imported

mostly from Japan & Korea
• Combined with locally manufactured parts

• The vehicles are mounted on assembly line to add tires,

seats and other accessories

• Various Quality tests are performed

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Regional Density/ Concentration
Cars per 1000 person
800 765
700 641
600 543
500 426
400
300
200
100 31 25 23 21 12 10
10
0

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Auto Data

Source-PAMA.
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Auto Sales figures:an unimpressive start
to
FY09

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• The bonanza of local car manufacturers has come to
a halt with local car sales plunging by 51 per cent in
the first quarter of financial year 2008-2009.

• According to recent numbers released by Pakistan

Automotive Manufacturers Association (PAMA), car
sales for the month of September were down 29 per
cent at 7,889 units against 11,072 units sold during
the same month last year.

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 Reasons:
• Declining real income of
consumers.

• Slowdown in car financing

due to high mark-up rates.

• The car financing became

more expansive due to
increase of 200bps in
discount rate in FY08.

• Price hike due to pass-on

impact of higher input cost.

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• Capacity expansion
– Capacity expansion under progress
• Import of Reconditioned Cars
– Govt. Policy discouraging imports, lack of spare parts, quality issues
• Steel Prices
– Pakistan Steel has increased the prices of its various products twice
in Feb 08 from Rs. 7,0000 to 8,0000 per tonne , which the steel
dealers fear may further increase prices of automobiles
• Exchange Rates
– Minor variations in Rupee-yen parity have a marginal effect

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• Interest Rates
– Expansionary monetary policy pursued by the SBP till 2004 and banks’ inclination
towards consumer financing gave great impetus towards market competition and
innovative products for consumer and auto-financing to lure their clients

120,000 20%
100,000
15%
80,000
60,000 10%
40,000
5%
20,000
0 0%
2001 2002 2003 2004 2005 2006 2007

Auto Loans (PRsmn) Interest rates

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 Budget FY 09
 Federal Excise duty of 5% has been imposed on import as well as
locally manufactured cars with engine capacity above 850cc.

 Fixed duty on all imported used cars/jeeps increased by 10%.

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• Duty rate on import of cars/jeeps above 1800cc has been increased
to 100% from 90% earlier.

• Rate of General Sales Tax (GST) on car purchase has been proposed
to increase from 15% to 16%.

• A withholding tax (WHT) of 2.5% on purchase of locally

manufactured motor car or jeep is proposed to be collected by a
motor vehicle registration authority at fixed rates depending on the
engine capacity.

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 MARKET SHARE
Engine Capacity Preference
200,000

150,000

100,000

50,000

0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*

13 0 0 - 16 0 0 c c ( 2 0 0 0 c c D ie s e l) 10 0 0 c c 800c c

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Market Shares of CARS
800 cc Category

Pie Share: 39%

19%
27%

54%

Bolan Mehran Cuore

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 1000 cc Category
Pie Share: 30%

5%

56%
39% Cultus Alto Santro

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 Luxury Cars 1300 cc+

Pie Share: 31%

6%
11% 66%

17%

Corolla City Civic Liana

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MAJOR PLAYERS

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 PSMC: Financial Performance HY’08
• Pak Suzuki Motors (PSMC) is the country’s largest auto manufacturer
with market share of 60%.

• During HY’08, the Company declared Rs599m profit after tax with
earning per share of Rs7.28 depicting a decline of 70.2%.

• Sales revenue of the Company declined 10.4% to Rs25.3b in HY’08

from Rs28.2bn last year mainly due to lower sales volume.

• Despite three times increase in car prices in the range of Rs5,000 to

Rs30,000 by the company during last six months, gross margins
plunged to 3.9% in HY'08 as against 12.7% in HY’07.

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The Company has a capacity to assemble 150k units per annum.

The plant is located near Bin Qasim (Karachi).

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 INDUS MOTORS
• To be updated !!!

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 Honda Cars: Financial Performance (1Q’09).

• Atlas Honda Cars (HCAR) declared Rs36m profit after tax .

• With earning per share of Re0.25 for 1Q’09 as compared to Rs20m

profit after tax with earnings. per share of Re0.14 in the
corresponding quarter last year.

• Reflecting a significant growth of 75.8%, despite double digit decline

in sales volume,

• Mainly due to lower financial charges and more than double increase
in other income. The administrative and selling expenses however
remained consistent.

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• In July, Honda Cars has launched new model of Honda Accord
and CRV in 2400cc categories.

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 DEWAN FAROOQ MOTORS
• To be updated !!!

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 SWOT ANALYSIS
• Strengths
• Country-wide 3S (Sales, service, spare parts) and distribution network
• Presence of consumer base
• Strong chain of vendor industry and assembler
• Consumer Financing- Auto Loans
• Joint venture with international brands that help in maintaining the
technology as well as the quality of the product. Major international
names ventured with Pakistani firms are:
• Japan
• USA
• Korea
• Do not require highly skilled labor in vendor industry

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• No close substitute

• Manufacturers and Vendors employ about 255,000 workers.

These are exclusive of the related repair shops working in
almost around the country in large number)

• Well established infrastructure (as compared to last 12 years)

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 WEAKNESS
• Capital intensive. This is the reason which restricts many local
investors.

• High prices and not very high quality vehicles.

• Time in assembling. Customers have to wait up to 11 months in

delivery of many cars.

• Lack of technological advancement in the indigenization (models) of

the product. Many of the local models are said to be OBSELETE in
Europe, America and Japan.

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• High cost of production and doing business
• Power shortages
• Underdeveloped vendor industry
• Lack of research and development
• Lack of training in vendor industry

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 OPPORTUNITIES
• OEM (Original Equipment Manufacturing), allows Pakistani exporters
to export spare parts to USA, Europe and Japan. Fortunately, the
spare parts of Pakistan (both in manufacturing and replacement)
were welcomed in the international market.

AIDP, developed by Engineering Development Board is expected to

provide assemblers a structure to base their expansion plans so as to cater a
target of 500,000 vehicles per annum by 2011-2012

One major factor that can not be neglected is the introduction of CNG.
This created a boom in the demand of the automobiles through out the
country within few months of its introduction. More CNG stations are
needed to be installed

Increasing standard of living and purchasing power

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 THREATS
• Expected rise in the interest
• Exchange rate risk associated with Japanese Yen and
Korean Won
• Rise in Steel prices
• Too many regulatory authorities
• Smuggling and under invoicing
• Import of reconditioned cars
• New Entrants - Chinese Auto companies (e.g. DONG FENG)
• Strict Emission control policy:
-- Euro II compliance , Use of catalytic converter
• No sign of any specialized training institute of program. No R&D
Program.

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• EDB (Engineering Development Board)
– Ministry of Industries, Production & Special Initiatives
– Tariff Group
– Policy Development Group
– Sector Development Group
– Business Development Group

• PACO (Pakistan Automobile Corporation)

– Established in 1973 under Federal Ministry of Production
– Nationalized units under took local manufacturing facilities

• PAAPAM (Pakistan Association of Automotive Parts Accessories Manufacturers)

• PAMA (Pakistan Automotive Manufacturers Association)

– To promote progressive manufacture of automotive vehicles (cars, commercial vehicles,
motorcycles, farm tractors) in the country.

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• TBS has replaced the Deletion Program for the local
automobile industry from fiscal year 2006-07

• Locally manufactured Parts subject to a higher customs

duty of 50%. While parts that are not manufactured
locally rather imported as CKD would be subjected to
35% custom duty

• Manufacturers are free to source its components from

any where in the world
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• To create an export-oriented auto sector
• The government plan is to increase
– Production turnover to Rs. 600 bn from the current level of
Rs. 210 Bln
– Annual export of parts to $ 650 mn from the current level of
$ 35 mn, by 2011
– Contribution in GDP to reach 5.6%
– And the share in manufacturing sector to 25% by 2011

• The local assemblers are given a target production level of

0.5 million 4-wheelers and 1 million motorbikes by 2010-11

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• Reduction in Cap for import of used cars reduced to
3yrs from 5yrs
• CVT has been added with CD
• 2.5% WHT on locally manufactured automobile units
• New entrants are allowed to import 100% CKD
components at the 35 % CD rates
• Duty and tax free import of 3 to 25 cars by the New
Entrants who would be making an investment of
$10Ml to $125 Ml
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• Companies that are producing more than 500K units
of cars in other countries are eligible to enter the
market

• The relaxed tariff structure for the new entrants

could severely impact local vendors

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Phase-wise Tariff Reduction

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 KEY ISSUES
• Road Side Dealers:
• Luxury cars take up to six months to be delivered
after booking
• Road side dealers start booking new cars in large
numbers when a car is launched.
• They charge extra own over cars by creating
artificial shortages and guaranteeing quick delivery
in return for the extra premium they charge
• Thus, in a way cars are black marketed

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 Car Financing Defaults
• From early 2000 till mid 2007, Car Financing boosted the sale of
automobiles in Pakistan with a record growth of 29.% in the industry
in 2006
• However, continuous default on part of buyers eventually led the
State Bank to put a hold on Car Financing by imposing restrictions on
it in the 2nd half of 2007. Interest Rate was increased from 16% to 22
%
• As a result, car sales declined by 7% during July-Dec 2007
• Defaulted cars are resold on a value comparatively less than market
value affecting the long term resale value of the car because a large
number of cars were defaulted
• Major issues aroused when people with an afford range of say 800cc
cars were allowed to purchase 1300cc cars on back of financing

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 Barriers for New Entrants
• Difficult to capture Pakistani customer who has more or
less complete knowledge about the existing firms but
knows little about international companies:

CHEVERLOT is not gaining popularity besides having string

global name

• Manufacturers don’t allow competitors to operate fairly:

ADAM MOTORS CAR DIVISION which was denied supply of
auto parts by certain local vendors on terms of other
players in the market

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 Quality vs Quantity

• Most companies are focusing on sales volumes as the demand is high:

Suzuki
• Some are focusing quality standards more than the volume: Toyota
• Few focus on localized products meeting differentiated nature of needs:
Shehzore Truck

Exports of Pakistani Cars are almost nil as the total

exports of Pakistani assembled CBUs was $0.7 million in
2007. So a great effort is needed especially in terms of
R&D by local companies to make cars that can compete
any international premium brand

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 Fuel Pricing, Alternatives &
Availability

• Upsurges in fuel prices are harmful for the industry

• As the fuel prices increase, customer inclination towards
small as well as fuel efficient cars increase shortening the
market for luxurious fuel consuming cars
• CNG kit installed in luxurious cars, that are not
recommended for CNG use, hampers performance

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 Car Thefts & Accidents
• Car Thefts have surged to a great extent in recent years and is
proving to be a menace for car owners.

• Too much expensive cars (imports) were usually avoided by

customers despite of having purchasing power because of
theft concerns. Moreover, accidents are increasing
unfortunately which also raise concerns for car owners

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 Low demand, high cost 150,000 lose job in troubled
auto industry

• Current turmoil in the automobile industry has claimed jobs of around

150,000 workers, mostly from auto-vending industries which are now
operating at around 40 per cent of their installed capacity.

• A survey of the auto-vending sector reveals most of the vendors increased

their capacity substantially in the wake of sustained growth of over 20 per
cent in automobile production during 2001-2006.

• This capacity is now lying idle as instead of registering some growth the
automobile production is on the decline.

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• Demand for automobiles started declining with increase in mark-up rates
on car finance while vendors are now forced to service their loans on
current interest rates as they had borrowed money at floating rates.

• At the same time, the vendors allege the deletion policy of the
government is in doldrums. Even in vehicles with a deletion level of 70 per
cent, they point out, the cost of imported components is much higher
than the price paid to vendors for local components. In fact, for 70 per
cent local parts the auto-vendors get only 30 per cent of the total cost of
vehicle parts while the foreign exchange component for 30 per cent
imported parts comprises 70 per cent of the total cost.

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 CONCLUSION
• There are no chances of resumption of a growth cycle in automobile in
the next two years.

• Cost of production has increased enormously due to high steel and

energy prices and auto assemblers are not prepared to increase the
rates of parts corresponding to the rise in the cost of production.

• The automobile industry in Pakistan is currently passing through a

difficult time. Declining auto demand and rising input cost are the real
challenges for the industry. Going forward, we expect that profitability
of the auto sector remains depressed in the coming quarters as well.

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