automobile pakistan
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INDUSTRY PRESENTATION
AUTOMOBILE SECTOR OF PAKISTAN
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FEW IMPORTANT TERMS.
CBU: (Completely Built Unit) This means thatthe wholevehicle has been assembled in someother countryandthenimportedtothe country.
CKD: (Completely Knocked Down) Theparts ofsuch vehicles
are imported butthe vehicle is assembled in the country.
SKD: (Small Knocked Down) Theparts ofsuch vehicles areimportedandaportion ofthe vehicle is assembled in thecountry. i.e Some sophisticated components are notassembled within the country
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Total investmentofRs.129 billion(Cars, SUVs, Motorcycles,
Tractors)
Directemployment in the sector is over192,000
Contributes morethan $3.6 billion totheeconomy
Import substitution resulting in annualforeign exchange
savings ofover $ 1 billion
Industry is the secondlargetaxpayer in terms ofcustomduty ,
sales taxand WH tax
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Source: Engineering Development Board
Industry Snapshot
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SEGMENTS OF PAKISTAN AUTO INDUSTRY
Cars and LightCommercial Vehicles (LCVs)
Twoand Three Wheelers
Tractors
Trucks and Buses
Vendor Industry
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Operational Environment
Industryoperates underfranchiseand
technical collaboration agreement with:
Japan Europe
Korea
China
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Production Process
Completely Knock Down Units (CKDs)are imported
mostlyfrom Japan & Korea
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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
765
641
543
426
31 25 23 21 12 10 10
0
100
200
300
400
500
600
700
800
USA
Malaysi
a
Japan
UK Philipp
in
Srilank
a
IranIndones
ia
India
China
Pakista
n
Cars per 1000 person
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Auto DataAuto Data
Source-PAMA.
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Auto Sales figures:an unimpressive start
to
FY09
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The bonanzaoflocal carmanufacturers has cometo
a halt with local car sales plunging by51per cent in
thefirst quarteroffinancialyear2008-2009.
According torecent numbers released by Pakistan
Automotive Manufacturers Association (PAMA), car
sales forthemonth ofSeptember were down 29 per
cent at 7,889 units against 11,072 units soldduring
the samemonth lastyear.
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Reasons: Declining real incomeof
consumers.
Slowdown in carfinancing
dueto high mark-uprates.
The carfinancing became
moreexpansivedueto
increaseof200bps in
discountrate in FY08.
Price hikeduetopass-on
impactofhigher input cost.
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Capacityexpansion
Capacityexpansion underprogress
ImportofReconditionedCars
Govt. Policydiscouraging imports, lack ofspareparts, quality issues Steel Prices
Pakistan Steel has increasedtheprices ofits various products twice
in Feb 08from Rs.7,0000 to8,0000 pertonne , which the steel
dealers fearmayfurther increaseprices ofautomobiles
Exchange Rates Minor variations in Rupee-yen parity haveamarginaleffect
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Interest Rates
Expansionarymonetarypolicypursued bythe SBP till2004and banks inclination
towards consumerfinancing gave great impetus towards market competition and
innovativeproducts for consumerandauto-financing toluretheir clients
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0
20,000
40,000
60,000
80,000
100,000
120,000
2001 2002 2003 2004 2005 2006 2007
0%
5%
10%
15%
20%
Auto Loans (PRsmn) Interest rates
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Budget FY 09
Federal Excise duty of 5% has been imposed on import as well aslocally 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 proposedto 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 theengine capacity.
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MARKET SHARE
Engine Capacity Preference
0
50,000
100,000
150,000
200,000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*
1300-1600cc (2000cc D iesel) 1000cc 800cc
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800 cc Category
Pie Share: 39%
27%
54%
19%
Bolan Mehran Cuore
Market Shares ofCARS
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1000 cc Category
Pie Share: 30%
56%
39%
5%
Cultus Alto Santro
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LuxuryCars 1300 cc+
Pie Share: 31%
17%
11%
6%
66%
Corolla City Civic Liana
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MAJOR PLAYERS
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PSMC: Financial Performance HY08
Pak Suzuki Motors (PSMC) is the countrys largestautomanufacturer
with market shareof60%.
During HY08, theCompanydeclared Rs599mprofitaftertax with
earning per shareofRs7.28depicting adeclineof70.2%.
Sales revenueoftheCompanydeclined10.4% to Rs25.3b in HY08
from Rs28.2bn lastyearmainlyduetolower sales volume.
Despitethreetimes increase in carprices in therangeofRs5,000 toRs30,000 bythe companyduring last sixmonths, gross margins
plungedto3.9% in HY'08as against12.7% in HY07.
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The Company has a capacity to assemble 150k units perannum.
The plant is located nearBin Qasim (Karachi).
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INDUS MOTORS
To be updated !!!
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Atlas HondaCars (HCAR)declared Rs36mprofitaftertax.
With earning per shareofRe0.25for1Q09as comparedto Rs20m
profitaftertax with earnings.per shareofRe0.14
in thecorresponding quarterlastyear.
Reflecting a significant growth of75.8%, despitedoubledigitdecline
in sales volume,
Mainlyduetolowerfinancial charges andmorethan double increase
in other income. Theadministrativeand selling expenses however
remained consistent.
HondaCars: Financial Performance(1Q09).
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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 FAROOQMOTORS
To be updated !!!
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SWOT ANALYSIS
Strengths
Country-wide 3S (Sales, service, spare parts) and distribution network
Presence ofconsumer base
Strong chain ofvendor industry and assembler
Consumer Financing- Auto Loans Joint venture with international brands that help in maintaining the
technologyas wellas the qualityoftheproduct. Major internationalnames ventured with Pakistani firms are:
Japan
USA
Korea
Do notrequire highly skilledlabor in vendor industry
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No close substitute
Manufacturers and Vendors employabout255,000 workers.
Theseareexclusiveoftherelatedrepair shops working inalmostaroundthe country in large number)
Wellestablished infrastructure(as comparedtolast12years)
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WEAKNESS
Capital intensive. This is the reason which restricts many localinvestors.
High prices and not very high quality vehicles.
Time in assembling. Customers have to wait up to 11 months indelivery of many cars.
Lack of technological advancement in the indigenization (models) of
the product. Many of the local models are said to be OBSELETE inEurope, America and Japan.
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High costofproduction anddoing business
Power shortages
Underdeveloped vendor industry
Lack ofresearch anddevelopment
Lack oftraining in vendor industry
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OEM (Original Equipment Manufacturing), allows Pakistani exportersto 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.
OPPORTUNITIES
AIDP, developed by Engineering Development Board is expected to
provide assemblers a structure to base their expansion plans so as to cater atarget of 500,000 vehicles per annum by 2011-2012
One major factor that can not be neglected is the introduction ofCNG.
This created a boom in the demand of the automobiles through out the
country within few months of its introduction. More CNG stations areneeded to be installed
Increasing standard of living and purchasing power
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Expectedrise in the interest Exchangeraterisk associated with Japanese Yen and
Korean Won
Rise in Steelprices
Toomanyregulatoryauthorities
Smuggling and under invoicing
Importofreconditioned cars
New Entrants - Chinese Auto companies (e.g. DONG FENG)
Strict Emission controlpolicy:
-- Euro II compliance , Useofcatalytic converter
No sign of any specialized training institute of program. No R&D
Program.
THREATS
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EDB (Engineering Development Board)
MinistryofIndustries, Production & Special Initiatives
TariffGroup
Policy Development Group
Sector Development Group
Business Development Group
PACO (Pakistan AutomobileCorporation)
Established in 1973 under Federal MinistryofProduction
Nationalized units undertook localmanufacturing facilities
PAAPAM (Pakistan Association ofAutomotive Parts Accessories Manufacturers)
PAMA (Pakistan Automotive Manufacturers Association)
Topromoteprogressivemanufactureofautomotive vehicles (cars, commercial
vehicles, motorcycles, farmtractors) in the country.
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TBS has replacedthe Deletion Programforthelocal
automobile industryfromfiscalyear2006-07
Locallymanufactured Parts subjecttoa highercustoms dutyof50%. Whileparts thatare not
manufacturedlocallyrather importedas CKD would be
subjectedto35% customduty
Manufacturers arefreeto 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 levelof 0.5 million 4-wheelers and 1 million motorbikes by2010-11
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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 upto sixmonths to bedeliveredafter booking
Road sidedealers start booking new cars in largenumbers when a car is launched.
They chargeextraown over cars by creatingartificial shortages and guaranteeing quickdelivery in return fortheextrapremiumtheycharge
Thus, in a way cars are black marketed
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Car Financing Defaults
Fromearly2000 tillmid2007, Car Financing boostedthe saleofautomobiles in Pakistan with arecord growth of29.% in the industryin 2006
However, continuous defaulton partofbuyers eventuallyledtheState Bank toputa holdon Car Financing by imposing restrictions onit in the2nd halfof2007. Interest Rate was increasedfrom16% to22%
As aresult, car sales declined by7% during July-Dec 2007
Defaulted cars areresoldon a value comparativelyless than marketvalueaffecting thelong termresale valueofthe car becausealarge
numberofcars weredefaulted Major issues aroused when people with an affordrangeofsay800cc
cars wereallowedtopurchase1300cc cars on back offinancing
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Barriers for New Entrants
Difficultto capture Pakistani customer who has moreorless complete knowledgeabouttheexisting firms butknows littleabout international companies:
CHEVERLOT is not gaining popularity besides having string
global name
Manufacturers dontallow competitors tooperatefairly:
ADAMMOTORS CAR DIVISION which was denied supplyofautoparts by certain local vendors on terms ofotherplayers in themarket
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Quality vs Quantity
Most companies arefocusing on sales volumes as thedemand is high:
Suzuki
Somearefocusing quality standards morethan the volume: Toyota
Few focus on localizedproducts meeting differentiated natureofneeds:
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 competeany international premium brand
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Fuel Pricing, Alternatives &
Availability
Upsurges in fuelprices are harmfulforthe industry
As thefuelprices increase, customer inclination towardssmallas wellas fuelefficient cars increase shortening the
marketforluxurious fuel consuming cars
CNG kit installed in luxurious cars, thatare not
recommendedforCNG use, hampers performance
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Car Thefts & Accidents
Car Thefts have surgedtoa greatextent in recentyears and is
proving to beamenacefor carowners.
Toomuch expensive cars (imports) were usuallyavoided bycustomers despiteofhaving purchasing power becauseof
theft concerns. Moreover, accidents are increasing
unfortunately which alsoraise concerns for carowners
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Low demand, high cost150,000 losejob in troubled
auto industry
Currentturmoil in theautomobile industry has claimedjobs ofaround
150,000 workers, mostlyfromauto-vending industries which are now
operating ataround40 per centoftheir installed capacity.
A surveyoftheauto-vending sectorreveals mostofthe vendors increased
their capacity substantially in the wakeofsustained growth ofover20 per
cent in automobileproduction during 2001-2006.
This capacity is now lying idleas insteadofregistering some growth theautomobileproduction is on thedecline.
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Demandforautomobiles starteddeclining with increase in mark-uprates
on carfinance while vendors are now forcedto servicetheirloans on
current interestrates as they had borrowedmoneyatfloating rates.
Atthe sametime, the vendors allegethedeletion policyofthegovernment is in doldrums. Even in vehicles with adeletion levelof70 per
cent, theypointout, the costofimported components is much higher
than thepricepaidto vendors forlocal components. In fact, for70 per
centlocalparts theauto-vendors getonly30 per centofthetotal costof
vehicleparts whiletheforeign exchange componentfor30 per cent
importedparts comprises 70 per centofthetotal 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 ratesof 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 profitabilityof the auto sector remains depressed in the coming quarters as well.
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