Daily Times

KARACHI: Entry of new auto manufacturers in Pakistan is expected to disrupt industry dynamics where the existing players shall face tougher competition resulting in dwindling pricing power and demand, said analysts.

“Pakistan’s passenger cars manufacturing capacity is expected to increase by 77% to 443000 units p/a by FY22 from 250000 units at present as ten new Original Equipment Manufacturers (OEMs) are expected to mark their entry into local industry to avail incentives offered under Automotive Development Policy II (ADP-II) for Greenfield and Brownfield expansions”, said Farheen Irfan, research analyst at Elixir Securities. According to ADP-II finalized in 2016, the government has allowed duty-free import of plant and machinery for setting up of assembly or manufacturing unit.

Via the Finance Act FY18-19, the government has also extended 5 year Tax Holiday on Greenfield Projects commissioned by June, 2021 (as long as they are financed by a minimum of 70% in fresh equity).These incentives have motivated the new entrants to tap local market. Recently, South Korean auto manufacturer, KIA Motors, in collaboration with its local partner Yunus Brothers Group – Lucky Cement, has launched ‘Grand Carnival’ in Pakistan.

Based on their previous era performance and much stronger local partners this time around, we expect KIA and Hyundai to attain a market share of 5-10% each within the first 3 years of their entry, said Ms Irfan.

“We believe that a gap exists for high quality locally assembled variants between 800-1000cc, which is currently being fulfilled by imported vehicles. Considering that currently only Pak Suzuki Motors (PSMC) caters to this high demand-growth segment, new entrants are likely to target 800-1000cc cars – along with SUV’s and Light Transport Vehicle (LTV)”, she added.

Passenger car sales in Pakistan grew at an annual average of 13 % since FY14, on the back of rising incomes (& purchasing power), record low interest rates, increasing consumerism, low motorization rate (18 vehicles per 1000 people), and higher economic activity. Resultantly, the three Automobile Assemble OEMs have enjoyed profitability CAGR of 43% during 2013-17. This allowed them to post a dramatic increase in Return on Investment (ROE) from an average of 17% in 2013 to 39% in 2017.

She expects total demand for passenger cars to reach 500000 units p/a by FY24 , which incorporates average growth rate of 7% for total demand during FY19-24.

Kia and Hyundai both were commercially assembled by Dewan Group in early 2000s. Historical data shows that within 3 years of entry, Kia attained a market share high of 6% while Hyundai’s market share reached a high of 9% in FY01.

“We believe this time both the brands will capture an even higher market share on the basis of local partners’ profile and absence of risk of cannibalization of sales – Lucky and Nishat Groups are considered amongst the top Conglomerates in Pakistan. Understanding from the local market dynamics, the key to win the small economy car segment stems from strong dealership network, easy and cheap availability of parts and after sales support; all of which need a strong financial muscle which we believe both the local players possess”, added Ms Irfan.

Currently, PSMC enjoys 60% market share in passenger car segment and is the only operational player in Small Economy (800-1,000CC) category. The high likelihood of KIA, Nissan, Renault and Hyundai entering in the same category would result in major loss in market share for imported vehicles, followed by PSMC. Other two incumbent players ie Indus Motors (INDU) and Honda Atlas Cars (HCAR) will not remain hedged against increasing competition either; as they come to terms with weaker pricing power, a wider range of price bands by competing brands, shrinking delivery period (resulting in lower cash balances) and attrition in market shares.

Published in Daily Times, June 5^th 2018.