Playing your cars right: an update

A lot has changed since the last time we talked about new car ventures, though most upcoming carmakers are keeping mum on the finer details of their investment plans. One can agree new market dynamics will affect both consumers and existing carmakers at the same time. Accounting for the different players that are entering the sphere (see table); our calculations generously estimate that Pakistan could see the size of locally produced car market to expand to 600,000 from its current 180,000 or so cars, by 2023.

That is a phenomenal jump for an industry that has remained below the 200,000 unit mark for decades, with new players entering with very little success. Most exits of new models in the past (e.g. Nissan Sunny, Kia) came at the helm of poor management of local partner, ill-planning or both. But with those lessons in the bag, the upcoming partnerships are expected to yield positive outcomes.

To review: Renault is still in the game, with their plan approved by the Board of Investment (BoI); Audi’s plans may not materialize as they are looking to invest in medium knocked down models with only an assembly plant in Pakistan. Nishat and Lucky, with Hyundai and Kia respectively, are in planning phases for the launches that could be as early as 2018. Meanwhile, existing carmaker Suzuki’s plans for an investment in a new plant have been put into the backburner as the company could not come to an agreement with the government on concessions.

Without giving too much information in its public notice, the latest announcement comes from Sazgar engineering that expressed the company would be venturing into the car business after much success in manufacturing rickshaws at their plant. With an existing capacity of 20,000 units, the company had earlier announced plans to expand its capacity given the rise in demand of rickshaws.

So clearly more companies are watching the market with interest, and demand is expected to increase manifolds, not just because of demographics changes but also higher overall incomes and cheaper auto-financing.

The most recent surge in demand for cars could be ascertained by the fact that dealers are now selling cars at premium rates and consumers are buying them like hot cakes just so they can get delivery immediately. This has put pressure on existing carmakers in more ways than one but it is nevertheless an indicator of demand.

The rise of used cars imports is another useful data point, currently 20 percent of the market. Moreover, the increasing popularity of car sharing apps in Pakistan and consumer receptiveness in this area is also interesting. These apps could give a healthy boost to car sales.

Already, aside from Bolan, passenger car sales have grown by 11 percent in 10MFY17 year on year with Honda’s Civic and City taking the lead, and Suzuki’s WagonR on the fastest growth track. Suzuki has already launched its new Cultus, along with earlier introducing Vitara and Ciaz that are being imported for now. Honda introduced an SUV and an uplift of its Accord. It is now planning to introduce an upgrade of the City. Indus Motors announced an expansion from its current 65,000 to 75,000 units.

As per our calculations, the high-engine compact segment will see the most activity over the next few years with the mid-to-small engine cars gaining less traction. Competition will be most fierce in the former segment too so perhaps over time; a healthy price competition could drive prices down.

But if growth trends of smaller cars such as Mehran, Cultus, WagonR; and imported cars such as Toyota Vitz or Diahtsu Mira are telling anything, why are most manufacturers bringing high-engine cars? The share of that segment in fact is expected to go over 60 percent. One reason is a global manufacturing bias. There are very few companies worldwide that have an expertise in manufacturing small or mini cars. These cars have unique engineering issues and are considered low margin for the carmakers.

But studies also show that as car penetration increases; consumers are looking for more features, more space, better quality and the look of the car always helps- bigger, it appears is better. Indeed while WagonR sales have fast increased, and Mehran has been a historically popular car most of its lifespan; the most sold cars in Pakistan are still the Corollas and Hondas of the world.

As talks of new entrants have emerged, it is exciting to see that existing carmakers are not laying low. If all goes according to plan, the auto industry in Pakistan could finally be getting its big break.