“Auto sector capacity will easily reach 650,000 units over next five years.”

Almas Hyder is an Engineer, Entrepreneur, and the Chairman of Synthetic Products Enterprises Ltd (SPEL) Group established in 1978 and listed on the stock exchange since 2015. SPEL is a fast-growing company specializing in the manufacturing of plastic products, particularly catering to the auto parts and component industry as well as meeting the packaging needs of the FMCG sector.

Almas has served on the Boards of several government, education, training, development and policy-making institutions including SMEDA, Engineering Development Board (EDB), Pakistan Industrial Development Corporation (PIDC), Punjab Small Industries Corporation and Punjab Skill Development Fund (PSDF).

He was the Chairman of the Committee formulating the Engineering Vision for Pakistan in 2000 and has been the founding Chairman of Technology Up gradation and Skill Development Company (TUSDEC) under the Ministry of Industries and Production. He was also on the Board of National Transmission and Dispatch Company Ltd and Head of Audit Committee of the Board. He is a graduate from the University of Engineering and Technology (UET) in Lahore and finished an Owner/President Management Program (OPM) in 2013 from the Harvard Business School.

In this candid conversation, Almas talks about the future of the expanding automobile industry and where the industry is headed over the next decade as new policies and new assemblers enter the playing field. Here are the excerpts:

BR Research: SPEL has recently made an expansion in Karachi after operating out of Lahore for years since its inception. What was the rationale behind this expansion in the south?

Almas Hyder: The Karachi expansion has been strategic for us. We make a variety of automobile plastic parts that go into the interior of the vehicle including door handles, console boxes, steering wheels, door trims etc. We have a large market share in the products that we make. Currently, we are making these parts for passenger vehicles, motorcycles, tractors and pickups, and we are supplying these parts to OEMs in Pakistan and in EU, manufacturing them at our plants in the north.

The Karachi move will give us the advantage of proximity from the port as well as to our customers since many OEMs have plants in the city. This will help us in minimizing delivery costs. We are taking a holistic view of the industry. The important factor here is that a number of new automobile assemblers are venturing into the automobile space, including Kia and Hyundai as well as Chinese players such as Changan, United Motors, Prince and Sazgar. Many of these companies have either already launched new models or are in the process of launching them. This expansion comes at the right time to make capacity available both in Karachi and Lahore—being closer to our imported raw materials as well as to our clients.

BRR: As you mentioned, new assemblers are coming into the market. Where do you see market volumes reaching over the next few years?

AH: In this year, the industry will make about 250,000 vehicles and next year the industry will easily cross 350,000 units. According to our calculations, the total manufacturing capacity of the industry will reach 450,000. Further expansions will take the capacity to 600,000- 650,000 units over the next five years, which I believe the industry will be able to accomplish without any difficulty.

BRR: These are very familiar numbers. When the automotive policy came out in 2016, the 600,000 number was thrown out by several stakeholders. The expectation at the time was that the volumes would get into the range of 500,000-600,000 by 2021. We are nowhere near that target. It seems macroeconomic instability, interest rates and other factors have never allowed the market to really expand.

AH: Anticipating the demand properly is difficult in an economy like ours. Sometimes assemblers have a six-month window to decide how many vehicles to produce and sometimes they don’t even know how much to produce for the next month. If the demand varies so much from expectation, supply is either short or inventories start to pile up. Secondly, yes there are a variety of exogenous factors that can impact demand—an increase in interest rates or any other macroeconomic event can derail estimates.

BRR: Do you think the new players will cut into the market share of existing OEMs and provide some tough competition to them?

AH: That’s the interesting thing. I believe, all three car manufacturers will maintain their volumes and their own growth. The new entrants are creating new market and not cutting into the market of the old ones. If you compare today’s volumes to previous years, you will see all models are holding their own space and achieving their anticipated volumes. The market size will expand.

BRR: What is the status of localization in the country. Afterall, dependence on imported parts and the fluctuations in dollar-PKR parity is a major cause of frequent price increases. Why hasn’t localization moved beyond cosmetic and skin parts? OEMs say there aren’t enough volumes to justify localization in certain parts.

AH: It is the volumes which impact localization decisions. But more so, it is the incentive structure. There are low duties on components which are not locally made. These components, it seems, will continue to remain non-localized due to the lower duties. It would not make economic sense for OEMs to get them produced locally. Lower duty reduces the possibility to incentivize localization. You can pick other industries, like energy, textile –a lot of the parts and components which can be made locally are being imported due to lower duties. Meanwhile, the raw materials and inputs of the components being locally manufactured have a duty on them. At times much more than the finished products. Some industries have been affected by the FTA with China.

If there is no localization, there is an economic reasoning behind it. Assemblers would only localize if it were profitable for them to do so compared to importing these very parts.

As for the automotive parts under the new entrant policy, the government had asked OEMs to localize parts within 5 years. They know it, and the vendors know it, that it can be done in a shorter time. The auto parts industry can very quickly retool their plants to manufacture new parts. The industry needs orders to make that kind of investment. No bank will extend a liquidity line to an auto parts maker without the manufacturer showing a solid business plan and confirmed orders. Banks want to make sure there is a customer waiting for the product to ensure sustainability of the project.

BRR: SPEL is making profits in an economy that is not doing so well. In fact, while most of your peers are in losses, you have made healthy profits even during the covid period. How has this been made possible and what is the distribution of your revenue between auto parts and FMCG packaging products?

AH: We started recession proofing our company many years ago. At the time, we were only working with Millat Tractors and supplying parts to them; we had one customer. If it shut down for six months, we would have huge trouble in keeping our doors open. We started to expand our customer base by going to Suzuki, Toyota and Honda etc.

We also looked at how we can venture into other industries. We started making cups and tubs for the yogurt and ice-cream companies, and started catering to the water industry, while manufactured packaging for hygiene industry and so on. FMCG is a large industry with a number of different sectors and a host of different manufacturers. If the automotive industry has a shortfall in demand at any time, and our sales drop in that sector, we have recession-proofed the company enough to ensure other segments will pick the overall sales up. During Covid, we maintained our sales, as last year due to this decision taken many years ago.

The other thing we did is that we started exporting steering wheels to about 13 countries. Although our sales are not very large, we have a quite a few markets open to us including Europe and the US.

BRR: Why have other companies in your sector not done the same—you mentioned that SPEL holds significant market share in the segments it is operating in?

AH: Not many people use the word reliability in their strategic plans, but it is an important word. We make sure that we maintain, and are viewed reliable to our employees, to our suppliers, bankers, and customers. We’ve never delayed wages or payments to our employees and vendors, unless they were informed beforehand, we have never provided shoddy or wrong products to our customers, we have never resorted to material adulteration and we have never evaded taxes. This type of integrity is rare. This is what makes the magic happen.

BRR: What are your thoughts on some of the Chinese vehicles coming into the market. Are they up to the mark and do you think Chinese companies are fighting a perception battle in the Pakistani market being Chinese?

AH: The cars coming in from all the new sources are good. Particularly, at a very affordable price point. What’s crucial for these manufacturers is to set up strong after-sales and back-up services. The Chinese cars being assembled here are all left-hand cars in China. With Pakistan, the Chinese companies are testing the right-hand drives. It is a test market for them and may become the base of exports for right hand drive cars. Once these vehicles are on the road, it will come down to their performance. Over the next 2-3 months of the launch, we will find out whether people are buying these cars with enthusiasm or will China have to fight an uphill battle.

As for perception, I had thought the Korean cars will have to fight this battle too but evidently, they didn’t have to, they created their own niche. The other thing is the Chinese companies are pricing their cars at the resale value of the used Japanese vehicles in the market. Now customers have a choice to either buy a second-hand, two-year old car or get a brand-new Chinese vehicle with similar or more features. There is a risk in the beginning which will be taken by a handful of car buyers while the rest of the market watches closely. It if works out, the demand will rise for these products. If it does not, Chinese companies will have to struggle to establish their names.

BRR: What is your view on used car imports? There is a restriction on imports currently which has boded well for local assemblers. Is competition not a good thing? Current OEMs have failed to provide choices to customers, why should car buyers not turn to imports?

AH: Used cars should not be allowed in the market. Importers usually misuse facilities for overseas Pakistanis and send money through gray channels. This can cause problems for the country especially under the FATF. Also, that is not the right kind of competition. It is not fair. The competition should be with imported new cars for which the duties and taxes should be rationalized.

Every country must make up its mind whether it wants to import or manufacture. There are examples of many countries who reduced duties on imported cars by so much, the manufacturers packed up their bags and left. Like in Australia. Now those countries are flooded with imported vehicles, but there is no manufacturing in the sector. The country must decide the direction it must take.

BRR: Very few people in Pakistan can afford to buy a new vehicle in the country. Do you see prices moving down over the next few years, and how can government facilitate middle class buyers that cannot afford entry into the market due to expensive vehicles, given also the poor state of mass transit in the country?

AH: There needs to be a first-time buyer’s policy in the country—which means, the government can give certain incentives to the first-time buyers to own these cars. For instance, if there is low sales tax on a vehicle for a first-time buyer, the price comes down by 10 to17 percent. There can be other tax benefits such as special interest rate for leasing or financing to reduce the cost of buying the vehicle.

Prices will fall as domestic competition grows. As an example, in 2006, the price of a certain Japanese motorcycle was Rs65,000. The company increased its price that year because of cost pressures. At that time, the government granted licenses to a large number of new companies to start manufacturing motorcycles in Pakistan. A lot of new motorcycles were launched, many of which were inferior and poor quality. But the average Chinese motorbike was being sold at Rs28000-30,000 or less, at that time, which propelled people to start buying the Chinese alternatives. Ultimately, the Japanese company had to go back on its price and actually reduced it down. Even today, the vehicle is priced around the level of 2006. When prices come down, the market expands—the motorcycle market has grown from less than 100,000 per annum to more than 3 million motorcycles.

The point is, in order to control prices and bring quality in the country, we have to create competition. Competition forces companies to make better products at cheaper prices. In such a scenario, companies who will expand, improve, localize in order to continue operating will be the winners. Others will die. As Dr. Edwards Deming says: “survival is not compulsory”. The focus should be on creating fair competition.

As I see the future, the market would be open to whoever wants to manufacture in Pakistan, then we will see where it goes.