Dealing with the auto dilemma

Ali Habib heads and actively oversees the operations of The House of Habib (HOH) - a conglomerate of companies ranging from automobiles to retail, ceramic tiles, packing materials and chemicals. The Group has four publicly listed companies, including joint ventures with the likes of Toyota.
Ali is a graduate of the University of Minnesota (Mechanical Engineering). He has attended the PMD Program at Harvard University and is the Founding Chairman of the Young Presidents Organization, Pakistan Chapter.
DEALING WITH THE AUTO DILEMMA As an automaker, Ali Habib has been facing a series of daunting challenges since the onset of economic slowdown in Pakistan. The most recent one being, the relaxation of the auto import policy on account of the industrys alleged failure to increase the indigenisation of parts and thereby lower prices for auto buyers.
Rebutting these allegations, however, Habib challenges anyone who can prove that the cars he produces in Pakistan are uncompetitive.
"The prices, net off taxes, are one of the cheapest in the world but people don know. Yes, prices look high, but thats because of the extreme depreciation of the rupee during the past two years. In fact, the Competition Commission of Pakistan made a comparison of car prices and our claim was vindicated," says Habib.
He questions the very wisdom of 100 percent indigenisation, also termed localisation in government circles. "Because of low economies of scale, it is not logical and viable to make 100 percent parts in Pakistan.....the government wants to penalise us for not localising engines, which we cannot manufacture because of the small scale," Habib told BR Research.
The car market in Pakistan is just around 150,000 units divided between nearly 10 models, he says, adding that engine manufacturing requires big economies of scale and certain policies.
A part of the blame also rests with the government that create uncertainties, says Habib, owing to which even local vendors of auto parts and equipments do not invest.
"Our cycle time for introducing a new model is five years. And so, I have to place orders with vendors two to three years before the production date.....but do I have predictability? Who will take risks? You know I am also answerable to my shareholders," he said.
The uncertainty Habib refers to is the overall economic uncertainty in general, as well the auto import policy in specific.
"At present, the duty is around 50-60 percent on most of the imported cars. If depreciation allowance will become 2 percent, then a 25-month old car will get a 50 percent depreciation benefit. This means the duty would drop to around 25-30 percent for a 25-month old car," he explains, adding that in contrast automakers pay 32.5 percent on imported cars.
"Importing vehicles under transfer of residence scheme by auto dealers is a crime," he says referring to the commercial import of cars by auto dealers under a policy that is essentially a residence transfer.
Asked if local auto players would capitalise on the efficiencies they are so confident upon, and export in the region, Habib expressed a kind of restrained-ambition.
"When Toyota asked me to write my dream and vision for my company on a board I wrote we wanted our country to export cars to Central Asia," he said. But he was quick to add that the relaxation of import policy is negatively impacting his plans. "Things change very frequently here, how can I convince my foreign partners?"
The unpredictability of policies, says Habib, is also going to keep other foreign investors at bay.
"If you were the president of a Chinese company and you had a choice to invest in Columbia, Brazil, Argentina, Turkey, Indonesia, Saudi Arabia or Pakistan, you will likely choose any country other than Pakistan, because here, as soon you will invest, they will change policies," he said.
Does this mean that he is not for Chinese investment in Pakistans auto sector? "No, we welcome them. But our point is that all policies should be applied uniformly. How can you deny something to company A and give it to B," Habib said.
As a consequence of dicey policies and economic challenges, the industry is moving at half the potential speed.
"We can expand. No one is investing because everyday we are being threatened. Lately, we invested and installed a pressing machine at the wrong time. It cost us Rs2 billion. Right now we are investing another Rs2 billion. I have already committed and I have no choice," Habib said.
RETAILING WHOLESALE Banking on the long cherished wisdom of not keeping all eggs in one basket, Habib has been busy diversifying into retail business.
"There is a huge scope in retail business...with a population of 170 million that is growing, consumption is expected to remain high in future and somebody has to sell," Habib explains the logic behind his move to enter into mass scale retailing business.
Although Habib has the competitive advantage of having expertise from supply chain management he developed from the auto business, he says he doesn enjoy a level playing field in the market. "Most retailers don pay taxes...my bakery in Makro pays sales tax. How many bakeries pay taxes in Pakistan? In such a scenario, it is difficult to compete," he said.
An uneven playing field in a business where the key of survival is in competitive pricing is definitely no walk in the park.
"Ours is a high volume game, because there is a lot of fixed cost. And this is the game which has to be played over time. We haven shown the kind of profits that businesses might extract in other fields," says Habib.
But he added that it is growing and improving every quarter. "We haven been in retail business before. This is something new to us, and we are learning and improving. We continue to gain strength and we are selling at competitive prices," he said.
When asked if he plans to expand Makro to other cities, Habib replies: "thats the blue print.....we are negotiating for some sites at the moment."
Interview by Manal Iqbal