“EV policy should provide uniform incentives for all batteries”
The automobile industry is going through exciting times. The Auto Development Policy of 2016 that is about to wrap up this year resuscitated the rather comatose industry, garnering interest of a new generation of auto investors that cherrypicked a whole range of global automobile manufacturers, ziplining to Pakistan from Asia and all the way from Europe to reap benefits of the fairly attractive policy.
Master Motors that has been assembling commercial vehicles in Pakistan joined hands with the Chinese giant, Changan Motors to bring the brand’s passenger vehicles in the country. In this virtual interview with the CEO of the company Danial Malik, BR Research learns that after the launch of its sedan, the next bold step for Master Motors is to bring Changan EVs into Pakistan, pending some policy clarifications. Meanwhile, in the long-term horizon, their Chinese partner has its eyes set on making the Karachi plant an export hub for right-hand-drive cars. One thing is clear: the partnership does not hold back on ambition. However, such high levels of investment and confidence would be contingent on the receptiveness of Pakistani car buyers to Chinese models and ultimately, the more immediate success of Changan cars in Pakistan. We discuss that and more with Danial in following excerpts.
BRR: How does your joint venture with Changan help you set apart in the cut throat competition of the automobile industry where other players are not only experienced in Pakistan but have a recognized global name as well.
Danial Malik: Let me walk you through our company a little bit to give you an idea. The Master group has a rich history and experience in the automobile industry. We started with Procon Engineering which is one of the largest autoparts manufacturers and has been around since 1988. We produce a whole range of auto parts including seats, sheet metal parts, steering wheels, front lining, floor carpets and mats etc. and we have been providing these different parts to Honda and Suzuki for years. We have the largest robotic welding facility in the country at our plant and a state-of-the art multi-density seat manufacturing unit. I can proudly estimate that 15 percent of every car made in Pakistan comprises of Procon parts.
The group’s Master Motors began operations in 2002 and we have been assembling commercial vehicles since. We started with Foton—which is China’s largest commercial vehicle company and has a joint venture in China with a 50:50 equity with Daimler which is the parent company of Mercedes. We went on to produce the full-range of the Japanese Mitsubishi Fuso’s commercial vehicles. Master Motors is a market leader in heavy duty and medium duty trucking segment.
In 2017, we introduce Yutong buses to the Pakistani market. Yutong is not only China’s largest bus manufacturer; it is also the world’s largest bus manufacturer. We became a market leader within three years of the launch taking market share from Hino and Daewoo who are very entrenched in the bus segment for the last 25 years. We took 70 percent of the market share, not by selling our product cheaper but by selling it more expensive because we were providing the latest generation product which gave a better value for money. We provided after-sales services, a robust spare parts availability and today we happen to be the only Chinese CKD assembler of buses in Pakistan.
So we have experience working with both the Chinese and the Japanese automobile companies in the past. Under the new policy, we decided to get into the passenger vehicle segment with a partner that would introduce the latest generation products to the Pakistani market with the highest quality, the most current technology and beautiful designs. We were confident that with Changan we would be able to create a market-competitive product that gives the best value for money and most of all, provide choices to the Pakistani consumer. I should mention what Changan has joint ventures with Ford, Mazda and Suzuki in China and it is the number one brand based on sales volumes for the last 10 years in the country. The company is also leading in R&D.
BRR: Why are the Chinese so interested in the Pakistani automobile market? Changan is surely not the first or the only one. There is FAW, Dongfeng, JW Forland; just last month we saw Ghandhara Nissan sign with Chery China. MG which is owned by the Chinese SAIC Motors may very well also set up a new plant. What makes this market so attractive, given how small the industry volumes are at the moment.
DM: As far as Changan’s interest is concerned, Pakistan is intended to be a strategic right-hand-drive manufacturing and export base for the company. That is how we positioned the Pakistani market to them. We are hoping to be the export hub for China in the future.
In general, if you look at the latest Chinese automobiles, they have beautiful designs and are equipped with the latest technology while being at very accessible price points. They may not have the prestige of a European, Korean or Japanese brand but they are where Japan was 30 years ago or where the Koreans were 10 years ago. They have made great advances in R&D, product design and technology and since the market contracted in 2008, Chinese brands have started making inroads into global markets in a serious way. They are interested in creating space for themselves in many markets such as South America, the Middle East as well as Pakistan where they can provide way more value for money with a far better and upgraded technology to consumers who are younger, well-educated, well-informed, social-media savvy but who may not have the buying power to afford premium established brands.
The Pakistani market particularly has the unique advantage of having more acceptability for Chinese brands than any other regional countries.
BRR: There is a recurring number that everyone seems to mention: the low motorisation rate of the country. This number is meant to indicate a large space or potential for growth to happen in the industry. What has now been several years, we have been expecting the market to reach 500,000- 600,000 in domestic manufacturing, but that number has barely ever been achieved. The market size, as a result, remains small. What is your survival strategy?
DM: There has been growth in the industry, albeit slow. Together with CBU imports, the market reached 353,000 units in sales in 2018 which was highest number reached to date. In 2019, we recorded 332,000 in sales, after which the country landed in an economic downturn and the market hit a slump—sales were roughly about 140,000 in 2020. The good news is that, this fiscal year, we are expecting the market to recover by 66 percent to volumes of 236,000 units. That rebound is fantastic. Our initial business plan suggested we will reach plant capacity of 30,000 units within 4 years, but at this point, we hope to increase capacity to 50,000 over the next four years after reaching 30,000 capacity within the next 2.5 years. In fact, we are aggressively working toward capacity enhancement. We are booked out for the next six months.
But as for a serious market expansion, we see several factors working towards that. One is low interest rates. Historic evidence suggests that the industry’s volumes are closely linked to interest rates. When interest rates go up, industry goes down. That relation will hold true in the future too. Market expectations are toward interest rates remaining low which will bode well for industry volumes.
Second factor is used cars. You would recall that about 60,000-70,000 used cars were landing in Pakistan every year. That has more or less ended due to government restrictions. But that does not mean that the customer is not getting anything. He now has options opening up in the form of new cars due to the entry of several additional players. Thirdly, with new choices available in the market, consumers are more encouraged to replace their old vehicles for new. A Corolla user may sell his old vehicle and upgrade to an SUV. The buying cycle here has shortened which has created additional demand which has been facilitated by more choices available to consumers.
BRR: Tell us about your sedan Alsvin—what has been the reception so far?
DM: For Alsvin, we conducted a pre-booking exercise, where we invited people to pre-book the vehicle which was an expression of interest. In the process, we gathered data on which variants and design specs they were interested in, which city they would want to drive in and other demand parameters. This allowed us to get a lot of market information fast. We picked 1000 lucky winners and invited them to book vehicles between 11th and 13th Jan. On the 14th, we opened bookings for the general population and within the afternoon, we booked our dealer quota until June. You can imagine the reception.
We also made sure that we discourage investor interest which leads to “own” in the market. We took substantive measures such as: a) no more than one car could be booked on the same CNIC b) bookings could not be sold forward and the car would only be delivered to the person that booked it and c) there was a higher down-payment on the bookings and we did not give an introductory lower price to the buyers where investors could immediately jump in. We have a delivery schedule of three months from booking.
BRR: The government is planning a new auto development policy to encourage small cars while the Electric Vehicles (EV) policy has already kicked off. Is Changan in the EV game, and do you intend to bring EVs into Pakistan?
DM: We are waiting on the final word on the EV policy to develop our feasibility. We have a full range of EVs and we are very excited to introduce them here. But a lot of work is required in the EV space. The current policy has limitations. For instance: in the import of batteries. The government is giving several incentives including 1 percent sales tax for batteries at or lower than 50KW. But for batteries beyond that, the incentives vanish because supposedly, they want to encourage small EV cars in the market. But there are several concerns here.
For starters, restrictions are typically put on engine size, not on fuel tanks (in the case of combustion engine vehicles). Batteries are like fuel tanks for EVs. It does not make sense to limit the use of a certain battery or base incentives on the size of the battery. Secondly, small batteries drain out faster and need to be charged on a regular basis. The country does not have a robust EV infrastructure –such as charging stations—available right now. Fast running out batteries would require more charging infrastructure. By providing the same incentives for large batteries, the government would be encouraging consumers to buy EVs because they give better mileage. There should not be a lock on battery size. Thirdly, batteries are an important component of EV which cannot be localized in the near future. This means, they will be imported. The incentive structure is such that a large volume of small batteries will be imported which would drain the foreign reserve compared to if larger batteries are imported as they deplete more slowly. This matter is a big question mark in an otherwise good policy.