‘We need a Made-in-Pakistan car’
Lucky Motors Corporation (LMC) is arguably one of the biggest success stories that the automotive industry has witnessed in years, having launched a wide range of new vehicles in a market starved for variety and choices. The investment was made possible through a fairly purposeful five-year policy developed by the then-government in 2016 that welcomed new assemblers to set up their plants in the country. The company has since launched several vehicles from the South Korean brand Kia such as the wildly popular SUV Sportage and a small-engine hatchback Picanto 1.0L. While Kia launches are underway, LMC is giving itself a challenge by hoping to bring more globally recognized automobile brands to its factory at Bin Qasim. European Peugeot of the Stellantis Group is one of them. With this new direction, the automobile market could expect not only a diversity of vehicles available but a pleasant change in style and technology compared to the Japanese models the car market is familiar with.
BR Research spoke to Asif Rizvi, the company's CEO, about the strong receptiveness of the market to Kia vehicles this time around after failing in the past, whether he believes the new regulatory and policy environment—with the introduction of a new auto policy—is conducive for volumes, localization and market development, and what vision and policy steps should the government really be actively seeking.
Here are excerpts from the discussion:
BR Research: Tell us about Lucky Motors journey—how did it all begin?
Asif Rizvi: Lucky Motors (originally Kia Lucky Motors) came into existence as a result of the government's new entrant policy which was fundamentally undertaken with a few objectives in mind. One of the main objectives was to create more competition among the auto players which previously were dominated by the three large Japanese players. The second objective was to make more models and options available to the consumers so they are not bogged by the limited models that were available to them in each vehicle category. The third was to eliminate the charging of premium in the market because when more vehicles become available in the market and there is also greater competition, the need to pay premiums is reduced, if not eliminated.
It was a good business opportunity for us to consider and was aimed at benefiting the consumers and serving the broader interest of Pakistan. When we started discussions with Kia, we found their management to be very forthcoming in providing us with a wide choice of models to select from which we thought would cater well to the needs of the Pakistani market. The main challenge that remained was overcoming the negative sentiment associated with Kia due to two previously failed attempts in Pakistan. This challenge was brilliantly overcome by our wonderful team LMC, and now there is no baggage with the Kia name.
BRR: What was your business strategy going into auto assembling? What have been your key goals as a new assembler and how are you achieving them?
AR: As a new assembler in the market, the cornerstone of our strategy was to offer consumers “a different beat”. We strategized that we wanted to be a SUV-only company and take the Pakistani consumer on a journey which the rest of the world is on. People across the world are migrating toward SUVs. In fact, globally in the last couple of years, there has been a decline in overall auto sales but an increase in the sales of SUVs. Other than our small car Picanto—which is primarily aimed at the largest selling segment, in terms of volumes—all our products currently are SUVs. Kia has some wonderful sedans in its global range, but we wanted to strategically create and expand the SUV segment in the country. We are doing this with Kia as well as Peugeot. That is our product strategy and we are very happy with how it is turning out.
The second strategy was that we would be very aggressive in establishing a dealer network in Pakistan. Kia has had two entries into Pakistan earlier and had failed each time on different counts. The confidence among car buyers and users was low. Consumers were saddled with product but no spare parts. We recognized that a strong dealer network was vital for our success and would be central to our business strategy. In a short span of under three years, we have been able to establish a network of 37 dealers in 21 cities.
Our expectations for this year is to reach 45 dealers spread across Pakistan. This has established confidence amongst car buyers that we are walking the talk, and has given them reassurance that they will be well-catered to once they make the purchase. If a Kia is driving down from Peshawar to Karachi, there would always be a dealer within the reach of 100 kms (or max 200km if it is on the highway). Another factor we have emphasized on is the ready availability of regular spare parts at all time for our customers.
Customer satisfaction was a big goal for us. We are the first company in Pakistan to give a 4 year/100,000 km warranty. This took away the risk factor from a new brand like Kia almost immediately, as the consumer was assured that we are standing behind our product. Ownership of cars is 4-5 years in Pakistan, maybe 6. Out of those, we have a warranty going with them for 4 years.
Finally, it was our desire to be a multi-brand company, being able to offer smaller volume of niche brands, because we had the facility but were not tied exclusively to any one brand. This was realized when we were successful in attracting Peugeot as a partner, becoming the first and only Pakistani company to have two international brands from across the globe. Both Peugeot and Kia are ranked among the top ten global auto brands.
BRR: SUV was a virgin territory in the automobiles market in Pakistan. Do you think you got lucky with Kia, given that there are risks involved being a first mover?
AR: I don't believe we got “lucky” with SUV. It was a well-thought out and calculated strategy based on global trends. This is the fastest growing auto segment globally. We have planned all our products as SUVs, and we didn't plan this after the success of Sportage. It was our plan all along hence we were able to meet the policy deadline. No other new entrant has launched five models within two years.
The SUV segment had a very low penetration of one percent in 2018 and now it has grown to 11 percent in 2021. Before we came in, other than one large-sized SUV, there were no SUVs. It was virgin territory but one where Pakistani consumer wanted options in, and we created the segments within the SUV category. Sportage created its own segment, the newly launched Stonic is part of the small SUV segment while Peugeot will create its own segment being a very modern-styled European vehicle. Sorento has filled the gap between Sportage and the large SUV of our competitor. Our three vehicles currently, with the fourth to be launched soon are creating a market in their own segments. Surely, as a first mover we had an advantage but the strategy was neither guesswork nor a fluke.
BRR: After Sportage's success though, the other SUVs you have launched are not seeing the same kind of success, and since your arrival, there are other players offering SUVs too. Have you lost the momentum?
AR: No. We created the SUV segment and almost everybody that came after followed in that segment. Several players came out with imported CBU 1500cc SUVs after we created the segment through Sportage. Yet, all the players that came after us, have really not been able to put a dent on our volumes.
The advantage that we enjoyed with Sportage continues. As far as our other SUVs are concerned, I would not say that they were not doing well. Sales for Sorento cannot be compared to Sportage. The former is a 2.4 or 3.5 liter, 7-seater with 6 airbags—remember, Sorento is a Rs 7-8 million car and that is a small market. There is a Rs 2.5-3 million gap between the two vehicles. The Rs 7-8 million car segment is going to be smaller and that was always the expectation. The market shrinks as you go up the price ladder, and this applies to vehicles of all assemblers, not just us. The cost of ownership increases, not only because of the higher price tag but also because of higher taxes and registration fees. But I will say, that we are having expected sales for Sorento in its segment too. Sorento is on a passenger vehicle platform and distinguishes itself from a truck SUV and those who own a Sorento realize the comfort of this. Meanwhile, we just launched Stonic and that vehicle is seeing roaring success. We are certainly not losing the momentum created by Sportage in any way.
BRR: How well is Sorento doing in comparison to one of its major competitors in the market, Toyota Fortuner?
AR: Our competitor's product costs about Rs 2-3 million more than our product. Clearly, they are in bigger and more expensive segment than us and cater to a different market. I would say, Sorento is a bridge between mid-sized SUV and a large SUV and therefore, it has its own place in the market and it will continue to expand this segment as more people find value. The 3.5 litre version is the most powerful engine in the market. We have excellent reviews from Sorento users. It was never going to be a high-volume seller. High volumes will come from Sportage, Picanto and Stonic.
The important thing for the consumer to realize is that our strategy has been to provide a range of vehicles within the SUV category—from a small SUV to a mid-sized SUV to a large SUV, we cover the entire spectrum for Pakistan, and then we have a European SUV coming in very soon. Using the global nomenclature, we have B, C and D segment SUVs which have created their own space in the market. When a company decides to have a range, there are some that will be high sellers and some not, but the customer has a broad spectrum to select from, which gives confidence and strength to the brand.
BRR: Can you elaborate on the size of the current SUV segment as you see it— and where do you see it headed over the next few years?
AR: When we launched Sportage, the SUV segment was less than 1 percent and has since grown to 11 percent. In the outgoing year, because of semi-conductor shortages, we were not able to manufacture as many vehicles as in demand and our sales could have been much higher. In that case, the segment could have much greater than 11 percent, and that is the latent potential.
The economy and small segment of the market in this country is about 60 percent and I feel SUVs will grow to 30 percent in just 2-3 years to come without a problem, with SUVs, primarily growing the market and some upgrade occurring from the sedan segments.
BRR: Lucky Motors is not part of the Pakistan Automotive Manufacturers Association (PAMA). Are there any plans to join the association and do your interests align?
AR: One of the reasons for not joining PAMA from day one was that we did not want to disclose our strategy, which is often given away in discussions and in disclosing sales numbers. We believed in keeping our head down and focusing on delivering our promise to the customers. Secondly, there is an inherent dichotomy between PAMA's objectives and the objectives of new entrants. PAMA represents, mostly, previous Japanese players of Pakistan that have been operating for decades and their viewpoints are often at loggerheads with the viewpoints of the new entrants; often also at loggerheads among themselves and auto part vendors. Hence, we did not want to be distracted by such activities and chose to remain independent as a new entrant.
The government on the other hand, has been very fair with us and all the new entrants. We are always invited to be part of the committees formed by the Engineering Development Board (EDB) and our opinions matter within government chambers. The EDB has played a very positive role towards the success of the new entrant policy through their facilitation. I see no advantage in joining PAMA. We chose to represent ourselves and have thus far created a position, in a very short time, for ourselves to be taken seriously.
BRR: Can you give us ballpark for volumes and revenues that you have achieved since launch compared to existing players?
AR: In our first full-year of operation, our sales touched Rs100 billion. That will give you a sense of where we stand. Our objective is to establish ourselves as a viable if not a better alternative to the previous players in the country for customer satisfaction. We want to provide the best vehicle options and after-sale service to our customers and have them be our representative. Our customers are our biggest marketing tool. Our vision is to be the most admired car company, and not necessarily to become the biggest or the largest, which we believe will be a natural by-product of the goal.
BRR: With the launch of the new auto policy, the government has offered incentives for assemblers to bring hybrids and EVs. Is there a market in Pakistan for EVs and hybrids?
AR: The first question I would ask is: what is the objective of the EV policy? Is it to reduce emissions and protect the environment or is it a fashion statement to keep up with the world? Fundamentally, Pakistan is a poor country. Our focus and emphasis should be to provide vehicles that a greater number of consumers can buy, one that allows people to upgrade from motorcycles.
Certainly, EV is a way of the future till fuel cell technology becomes commercially viable. The hybrid is neither here nor there. The EV policy is considered important because it is aimed to reduce emissions but it will cost upwards of Rs 7-8 million. This category of buying power is extremely small. Currently, the number of cars that are sold costing around or above that price range are no more than 5 percent. If we take last year's market of 220,000 vehicles sold, and assume an EV penetration of 3-4 percent (global penetration of EV is 6%), it is a total of 8,000 vehicles. Such volumes cannot have any significant impact on the environment, not even in the mid to long term due to market and cost dynamics.
I feel that the government went into this policy without any clear objective in mind. If the objective was to cut down emissions and help the environment, then this policy has already failed as there has been no significant interest except from the extremely affluent. On the other hand, an EV policy may be fashionable and make it seem that Pakistan is keeping up with the rest of the world, but on ground, it has no viability due to cost and segment size. Hence, this policy is only a fashion statement.
BRR: Why do you feel there is no viability for EVs or hybrids?
AR: Firstly, there are no appreciable volumes in this segment because of the significantly high cost of ownership. EVs cost 40-50 percent more than internal combustion engines (ICE) and hybrids cost 30-40 percent more. Does the Pakistani market have such buying power? Within the new policy, the government has lowered duties on these vehicles but just lowering duties to make a category successful does not create long-term viability, and even despite the duty reductions, these vehicles are going to be very high cost.
Secondly, the policy targets the wrong segments, that of private cars, large trucks and 2/3 wheelers. A private car is used very little, maybe 3-4 hours a day. It is the most underutilized resource. If the government truly wanted to reduce emissions and protect the environment, the first entry point for electrification should have been public transport which runs all day long. Can you imagine the amount of fuel consumption in public transport compared to private vehicles and the pollution public vehicles generate? It is manifolds.
A good EV policy should have been aimed first to convert public transport vehicles to electric, instead of going after private vehicles, large trucks and 2/3 wheelers, where carbon quantum simply does not exist to make an impact on climate change. Public transport EV policy implementation would also firmly have been in the hands of the government to make it happen, instead of commercially driven.
Many a well-meaning policy fail because the objective is not well defined, or the timing is wrong or the pathway is not clear.
BRR: Essentially, you believe electrification cannot truly happen in Pakistan with the current policy. The other major objective under the policy is to enhance localization and increase volumes. Do you see that happening?
AR: Frankly, the current auto policy is very limited in its vision. There is nothing in the policy that promotes more localization, and more indigenous production of vehicles. Just writing something in a -policy doesn’t make it happen automatically. We talk about localization all the time but now with 12 new players and 3 old players, the volume of most models will be so small that localization is going to be extremely restricted.
Lucky Motors presented a detailed proposal to the government to promote a local “Make in Pakistan” car. Another proposal was made to promote indigenous manufacture of basic raw materials. Both these proposals were included in the first draft of the policy but unfortunately, not in the final policy, except for an overall statement of intent without specific focus to drive the initiative.
There is no long-term vision in the auto policy. The long-term vision ought to be that Pakistan should have a local car. Malaysia has done it with Proton and India has done it with Hindustan and Premier and from there, these auto markets developed dramatically. In Pakistan, we are just continuously assembling imported cars, and not focusing on deep localization.
We made a sincere recommendation to the government for the long-term viability of a local car but evidently, there is no focus on anything long-term. This country does not even make fundamental raw materials, and yet we desire to make cars cheap for export. How can we export cars on a competitive basis if we do not indigenously produce fundamental raw materials, nor do we have the volumes, considering also that existing volumes are highly proliferated? Exports are possible only if overseas partner companies grant the right and opportunity to do so, but that will be a limited choice, if at all. The question to ask is: are we globally competitive in making a car? We do not have volumes; we do not have raw materials and we certainly don't have a policy to promote either.
BRR: Do you believe that the incentives—including duty and tax cuts— under the policy are not useful for localization at all?
AR: The automotive industry in Pakistan is a protected industry. That means, there are high duties on completely built units (CBUs) that make it economically viable for assemblers to assemble vehicles locally. In the last 2-3 years, there have been as many as seven changes in the duties and sales tax in the auto industry. Let me give you a rundown. FED was introduced, additional custom duties (ACD) was increased from 2 percent to 7 percent, then FED, ACD and sales tax were reduced. Now FED and sales tax have been increased. How can an important industry contributing up to 4 percent to the national exchequer be expected to work efficiently with such instability in policy?
All the government does is play around with duties and taxes. It is very easy to make cars cheap if all taxes are reduced to zero (govt collects between 38-45 percent of selling price) but that does not actually make a car economical in the long-run? Do such changes promote localization and does it reduce the dollar bill? The answer is no, and no.
Until the dollar bill reduces and there is deep localization, reducing and increasing tax or playing with duties achieves nothing long term. Illustratively, a few months ago when the powers to be reduced FED and sales tax, they should have had the foresight to know that this would increase volumes which would put pressure on the import bill and adversely affect the current account balance.
Wasn’t it clear that another adjustment would be required to reduce the import bill? That is exactly what happened—in the mini-budget, all these taxes and duties have again been increased. There is no perception in our short-term or long-term auto policy. The policy is visionless.
What's most concerning is that the current localization happening is not leading to a major reduction in the dollar bill. What we call localization is in fact, local purchase. This means, much of the raw materials and components are imported in dollars anyway. The only difference is that instead of importing auto parts in a built-up form, we are importing either in the form of raw material to be converted or components to be assembled locally. While companies may claim local purchase is 50-60 percent, the true localization value-add in the country is 18-20 percent only.
If true localization was happening, our import bill would have reduced as much or close to the localization level. However, that is not the case as is evident by the percentage increase in price compared to percentage increase in depreciation. With no local raw material production and low proliferated volumes, we cannot expect local value-add to increase much. We are converters, not manufacturers!
BRR: Tell us about your proposal for the local Pakistan car.
AR: Ideally, there should be a policy that has a clear objective. For instance, in ten years’ time, we should be producing a local car with 70-80 percent real localization, and to achieve that, the government would offer the necessary incentives and tools.
Our proposal was to have a three-tiered kit import policy for a small car where, with increased localization, the duty on the rest of the components would decrease. This would incentivize moving to the next tier and achieving higher localization. The other proposal was that the government would assist an interested party in getting the approvals and testing of these vehicles in foreign testing labs to get them certified for road-worthiness. Additionally, the government would assist the party in buying the manufacturing rights for making a car locally from a global brand. This was done in India by Hindustan with Morris for 57 years, Premier with Fiat, and Proton in Malaysia with Mitsubishi. To have an exportable car with competitive advantage, this is the ideal model we should follow and manufacture a “Made in Pakistan” car.