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TEXT: The past few years have been rather exciting for Pakistan's automobile industry, which was bolstered by a set of carefully engineered policy steps undertaken by the previous government which manifested into an industry that promised growth, both horizontally and vertically. Over the five years of the policy implementation, the industry welcomed new auto players, new car models, and new approaches to doing the automobile business.

But even with the evolving industry - which one should label "expanding" if the blip in FY20 could be forgiven - automobile giants like Indus Motor (IMC) that have been assembling the prestigious Toyota vehicles in the country for over three decades has maintained its market supremacy. Numbers corroborate IMC's leadership. Indus Motor's share in the passenger cars, LCVs and SUVs assembling segments has grown from 24 percent in FY18 - by far the best year for the industry in terms of volumes - to 32 percent in FY21. Over the years, the addition of Hilux, Fortuner and the recently launched Yaris has certainly added wings to the company's growth potential and market positioning.

In present day, policymakers in the country have taken the success of the previous policy as a benchmark and intend on taking it a few steps forward. They have proposed a new policy for the industry, that intends to make Pakistan a competitive manufacturing hub for auto parts and vehicles not only for local markets but also for markets abroad.

Novel ambitions, indeed. How does the automobile industry view the policy, how will it impact industry growth and where is the industry headed; to answer these burning questions, Business Recorder spoke to Asghar Jamali who is the current Chairman of Pakistan Automobile Manufacturers' Association (PAMA) and has been the CEO of Indus Motor, arguably the biggest automobile assembling plant in the country, since 2017.

Following are excerpts...

BR Research: Give us the broad contours of the new auto development policy. How is the industry receiving it?

Asghar Jamali: I want to first give compliments to the government of Pakistan for introducing such a policy. I have a career in the industry spanning 21 years and I have never seen such a progressive auto policy introduced by a government. This policy covers not only the automobile manufacturers, it is in the interest of consumers, it hopes to boost the vendors industry because they are an integral part of the value chain and the government's exchequer will also gain as the industry will generate more taxes. The most important aspect of the policy is that it covers all the technologies in the growing automobile market including incentives for internal combustion engines (ICE), electric vehicle (EV) and hybrids. There are also incentives for first-time buyers in terms of financing. To protect consumer rights, it is now mandatory for car manufacturers to pay Kibor+3 percent to car buyers on late delivery of motor vehicles. Earlier this was just a suggestion and it was being followed by Indus Motor and Honda, now all the manufacturers will have to as a requirement.

BRR: How collaborative was this policy? Was it designed keeping in view the inputs of key stakeholders such as assemblers like Indus Motor?

AJ: That's another important aspect. This policy went through several deliberations with inputs from all stakeholders involved. Within the government, there was the involvement of Chairman FBR, Commerce Minister, Finance Minister. PM Imran Khan was also very keen on making this policy a success. It was because of the collaboration and stakeholder involvement that I believe, the policy was able to cover the complete 360-degree aspect and become a well-thought document. Let me just clarify also that the policy measures that are to be taken have been added into the finance bill.

BRR: Let's talk about consumer interests. Prices have now gone down because the government reduced FED and sales tax. But that does not make cars affordable in the long-term because manufacturers raise prices due to the growing cost of production which depends heavily on imports. When the currency weakens, imports become expensive and we enter another phase of price increases. What is your view of that?

AJ: First of all, let me just say, car prices have come down for every brand and every model in the market which has never happened before in this country. The government decided to reduce their own taxes, even in a situation when know they need more fiscal space. Why? Because they had the vision that if the industry begins to expand, the revenue to the government would multiply due to increased volumes. By cutting taxes, the government of Pakistan has done their job. The ball is now in our court. Before this, taxes and duties constituted 39 percent of the price of a vehicle which is very high.

Through this step, the government has tried to rationalize the multi-level tax structure which ultimately benefits consumers in the long-term.

Second of all, it all comes down to localization. The more we localize, the impact from the exchange will reduce further down. But also remember that, even when automobile manufacturers localize, the raw material for the localized parts come from abroad. For instance, if we are making a sheets metal part, the sheets are imported. If we are making a plastics part, the resin comes from outside. The import burden of that will have to be borne which would impact costs given changes in the exchange rate, but naturally, not as much if we were not localizing. Let me give you Toyota's example, anything you can touch, feel or see is made in Pakistan. As one company, every day, we buy Rs250 million worth of parts within Pakistan - that's more than Rs70 billion purchasing within the country. Other automakers are also buying locally and new entrants will also start doing it soon.

BRR: In terms of value percentage, what is the current localization? How does the industry achieve more localization?

AJ: Let's do the math here. For Indus Motor, assume there is a car priced at Rs100, we remove taxes from it - about Rs40 - we are left with Rs60. Of this value, more than 60 percent is purchased in Pakistan and the rest -40 percent is imported content. So, for Corolla and Yaris, we have localized more than 60 percent while for Fortuner and Revo, our localization is less because the volumes are low. For other brand vehicles in the market, I would say there is a difference of 5 percent in each direction. Smaller vehicles are highly localized.

To localize, you need volumes. Economically, the investment into localization has to make sense. Any new project that we bring in requires Rs15-18 billion - that is more than 100 million dollars - to bring a new vehicle in Pakistan. If we don't have volumes, we cannot amortize dyes and molds and it would make more economic sense to import.

Now with the price reduction and the attractive interest rates, the automobile market will expand. Once the market expands, the localization makes much more economic sense for assemblers. It is an entire cycle. When the market grows in volumes, localization becomes viable which then reduces the import burden and in turn, the impact of the exchange rate would be much lower. When the dollar goes up, the costs have to be passed onto the consumer but with increased localization, the impact of that would be less.

Rationally speaking, in a country where the currency continues to depreciate, anybody would be crazy not to localize. We have to give time to the new entrants who I'm certain will also start to localize soon. They are on a learning curve; the great thing is that we have all the major brands in the world now available in Pakistan.

BRR: Volumes will lead to more localization. What level of volumes are required to get to a desired 60-70 percent localization across the industry? Can we target such a number?

AJ: To have proper localization, you require at least 30,000-unit volumes every year. This is for each model. If the volumes reduce or continue to go down, the localization difficulty keeps on increasing.

BRR: Where is the market size headed next year?

AJ: Currently, this is a market of 250,000 units. Even this year, due to Covid, there were many supply-chain obstacles that businesses were facing due to container shortages. Assuming we are operating in a business-as-usual market where these discrepancies are removed, we have a capacity of 450,000. For locally assembled vehicles alone, the market can very easily touch 325,000 to 350,000 next year - that's an increase of 30-40 percent from this year.

BRR: One controversial incentive in the policy is reduction in additional customs duty (ACD) and regulatory duty (RD) on imported Completely Built Units (CBUs). The government's rationale is to reduce the delta between imported vehicle price and localized vehicle price to give a little bit competition to the local players. But doesn't this contradict with the policy's primary aim to promote localization?

AJ: The government wanted to reduce the RD on the vehicles and there is a difference on opinion within the government whether this should be done or not. Reducing these duties will impact the foreign exchange because more imported vehicles may come in with this incentive.

As an automobile manufacturer, if the government wants to reduce the delta and minimize the protection we have from imports, we are not opposed to it and it is the government's decision to do that. As a company, we are also importing vehicles in CBU form such as the new Land Cruiser. We will benefit from this reduction in duties as demand for such vehicles is robust in this country. But if you ask me, the more we promote local manufacturing - and thereby reduce the import bill - the better it is for the economy.

Local manufacturing is the key to success. Ultimately, the government has to decide. As CEO of Indus Motor and Chairman PAMA, it favors me, but as a Pakistani, I have a responsibility to give the right feedback and I believe we should focus on and incentivize domestic manufacturing versus imports.

BRR: You said in an interview elsewhere that 5 jobs are generated to manufacture one car in Pakistan. Can you explain how you came up with that number?

AJ: Automobile manufacturing around the world is the mother of all industries. When OEMs manufacture one vehicle, we are generated the least number of jobs. Assuming we want to add 10,000 more units of production, we may be able to do it with 500-1000 employees. Per vehicle, we create about 0.25 jobs of the total 5 the industry employs.

In fact, a huge portion of the total - 1.5 jobs - are created by the vendor industry. Within the industry, there are Tier 1, Tier 2 and Tier 3 vendors. If an assembler expands - assuming my earlier example of 10,000 more units - there are various jobs that go into the vendor industry. After that, we have to add the jobs generated post-manufacturing. A survey conducted in Pakistan found that of the 100,000 vehicles being run on the roads, 25 percent of those cars are chauffeur driven - that's 25,000 jobs for drivers.

Meanwhile, 1.25 jobs are created between the dealership network for after-sale services and in the after-market for change of parts such as tyres, side mirrors etc. The last step is logistics - 2 jobs are created in logistics. To illustrate, we buy millions of rupees worth of parts from vendors within Pakistan. Indus Motor currently has 60 suppliers in the country and every supplier has a Tier 2, Tier 3, Tier 4 vendors. An estimated 250 people are involved in this end of the chain. These parts makers are also importing. Logistic jobs are created when they import those parts onto their facilities, when these vendors send us the parts and when we ourselves import parts on a daily basis from the port to our plant. Once the car is manufactured, we send off these cars to the dealerships and customers across the country where we are also creating transport jobs. Combined, this massive logistic network is creating a large portion of the total jobs that the industry generates. This does not mean that if we make 100,000 more vehicles, automobile manufacturers will hire 500,000 more people. No, the job creation in the industry is dynamic and has a trickle-down effect across the value-chain.

Copyright Business Recorder, 2021


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