Changan is number one in volumes amongst all new automotive entrants’
After decades of Japanese dominance, the Pakistani four-wheeler automotive market is suddenly inundated with new origin brands, more variety and just a larger array of vehicles for car buyers to select from. Among the many new players, the Chinese entering the arena are offering something a tad more: affordable price points for full spec cars. Are car buyers biting? Chinese brands certainly have to play the long game here which is why their focus has been to capture the market first, set down their roots, and everything else later. For Master Masters that has been in the automotive business for years before joining hands with Changan, China’s biggest automaker, this opportunity does not seem to be one-off before exit. The company seems to be here for the long haul. The strategy has been to enter in every segment there is and to perform at par or even better than other emerging players in the field. After launching afamily van and an entry-level sedan, Master Changan started volume production of its new SUV Changan Oshan X7 this week.
But who is the absolute victor in the volumes game and who is not, only surefire numbers can tell (which no new player wants to disclose), but market sentiments talk louder than words. The verdict: the industry still has a long way to go. BR Research sat down with Danial Malik who is the young CEO of Master Changan Motors to discuss current strategy, future prospects within the industry and where does the new auto policy fit amidst all this. Are we on the right track?
Danial holds a Bachelor’s degree in Entrepreneurship and Global Business Management from Babson College (USA) and a Master’s degree of Design in Strategic Foresight and Innovation from Ontario College of Art and Design University (Canada). He returned to Pakistan in 2017 after working abroad in innovation and management consulting to head Master Changan.
Here are excerpts from the discussion:
BR Research: Last time we talked, Master Changan was just in the process of pre-booking the sedan Alsvin. You are now launching an SUV. Give us your first impressions about how the business is doing right now since the launch in 2018.
Danial Malik: We are as you know a joint venture between Master Motors and Changan Automobiles, the number one Chinese automobile brand in China for the last ten years. We set up the project under Master Changan Motors Limited which was the first of its kind joint venture in the last 30 years after the Japanese companies that came in the 1980s. We made an initial investment of $100 million with a plant capacity of 10,000 units on a single shift basis and within just a matter of three years; we have expanded to a capacity of 50,000 units on a double-shift basis and a further $36 million investment.
Last year, we did massive capacity enhancement because our car buyers loved our products. I am extremely proud to say that for the last six months, Changan would rank number four in the Pakistan auto industry in terms of sales and production and we are number one amongst all new entrants.
BRR: That’s excellent. Perhaps market perception is slightly leaning toward Lucky-Kia being the dominant new player right now. Give us some numbers.
DM: We don’t disclose actual volume information publicly, but you can verify this based on imports and sales data for other players. I can tell you that we are running at about 80 percent capacity utilization. Another exciting information I can share is that Karvaan which is our 7-seater mid-sized van has 53 percent market share in its category and is number one in its segment which is incredible considering that it has managed to dominate this segment in only three years.
We are equally if not more excited about Alsvin. As you know, most new entrants came into the SUV category launching products that had virtually no competition. Alsvin was launched into a segment that had intense competition. We brought choice to this segment, the latest technology in the current generation model and features that did not previously exist in the segment, such as: sun-roof, tire pressure monitoring system, cruise control etc. These features were available in really high-end sedans; we are giving them at an entry-level sedan segment.
Our customers love Alsvin because of its performance and most importantly, its fuel-efficiency, which coupled with its built-quality, has managed to gain 24 percent market share within its segment in a matter of months while we have been ramping up capacity.
As a new entrant, we want to ensure the market that we are not a one-hit wonder. Our strategy is very well-thought out. We want to bring multiple successful products across categories and grow market share in them. Through volumes, we can localize more and compete effectively. This also enables us to bring these vehicles at price points that are more accessible for the consumer.
BRR: You are now launching an SUV much like other new entrants. How does it differentiate itself from other SUVs in the market? Why does Pakistan need more SUVs?
DM: Initially, a lot of new players were bringing SUVs because competition was limited and it was an open market for new models and brands which remained untapped by existing players. Globally, consumers have been transitioning from sedans to SUVs which is a dominant trend worldwide. That is where most markets are headed. New entrants foresaw these global trends and selected products for Pakistani consumers.
There is now a variety of different SUVs in the market (about 8 new SUVs) that have capitalized on this need for choice in the market. Yet, we identified a big prevalent gap in the very segment. It started out with crossovers that were just oversized hatchbacks which are extremely compact but consume a lot of gas and have obsolete engines—all of which are Euro-II—these models are substantially dated and in fact, have been discontinued globally. On the other side, we have larger SUVs that are designed for off-roading. There were a large number of customers that longed for an urban SUV that delivered fuel efficiency and performance at a comfortable price. Not only that, an SUV that was current generation and best in technology in line with global technologies out there.
That is the segment we are tapping. The Changan Oshan is a Euro-VI engine which is the first time a Euro-VI SUV will be assembled in Pakistan. Secondly, it is equipped with advanced autonomous technology which is also being introduced in Pakistan for the first time. We have been testing at level-three for autonomous driving and based on that rigorous testing, we have introduced autonomous technology which is compatible with Pakistani roads. This will not only improve the driving experience but in fact, make it much safer. Thirdly, it is a large-sized SUV which comes in both five- and seven-seater configuration. Normally, SUVs in Pakistan either have five seats or seven seats. We wanted to bring that additional choice to the customer. Pakistani family sizes are very large (in Punjab, it is 6.3 people per family) so we wanted to cater to those market needs with our product. Additionally, it is the most powerful engine in the SUV segment. It goes from 0 to 100 in 8.3 seconds—that’s a hair-raising performance. I like to say, we are bringing a future-proof SUV in the market.
Most importantly, and this should be exciting for Pakistani customers, because this SUV launch marks the global premier for this model for all right-hand markets and Changan selected Pakistan as a platform to do that. The market is used to products that have been globally launched for two-three years before they are showcased in the country while for Oshan, Pakistan is launching this product for the world.
BRR: Do you expect difficulties in fuel compatibility given the SUV technology is Euro-VI, a first in the market?
DM: As first movers in the segment, there are always challenges and we realized early on that we have to do this in an informed and calculated way. Fuel compatibility is a myth when it comes to Euro technology. Euro technology has to do with emission standards, not necessarily how the engine is working with the fuel. We have been testing the engines in Pakistan and have modified the engine control unit (ECU) of the vehicle which is programmed for Pakistani fuels. We are very confident that it will have no major challenges when it comes to Pakistan. We advise customers to use Euro-V fuel that has been introduced and only go to branded gas stations. We have been rigorously testing this engine for endurance all over Pakistanunder local fuel, terrain and weather conditions and it has been performing phenomenally well. When it comes to fuel consumption, while other cross-overs are doing between 8-10 km/liters, our product is doing up to 12-14 km/liter which is considerably improved fuel efficiency (over 25%) because of this Euro technology.
BRR: You have been launching products in different categories. What is your product strategy as a company? Lucky Motors for instance told us that they want to be an SUV company and that is their long-term product strategy.
DM: Right off the bat, our approach is very simple. We are asking ourselves what is the problem we are solving. What is the gap in the market, what are the pain points of the customer and how could our product address those? Our product strategy has always been customer-centric. We speak directly to the customer and try to understand their needs and provide a solution to those needs accordingly. This is also how we plan and marketour products. When we try to reach the customer by understanding their needs, they are more receptive to what we have to offer. That’s how we have been positioning our products and entering different segments.
Ultimately, we want to be in every segment. We are in the van and pickup segment which is 11 percent of the entire market. Then, there is the segment C sedan which is high-end sedans and the SUV segment which is a combined 30 percent of the market. We are launching a product in this segment as we speak. Then, there is a segment B sedan which is entry-level sedans and had a market of 19 percent in 2021. We are in this segment too with Alsvin. We are the only new entrant with the most diverse portfolio at different price ranges to enter different segments. We want to be in healthy volume segments and have multiple volume-based products. This makes our business model more resilient to economic downturns as well as different market booms and busts over time.
BRR: As a Chinese vehicle assembler, you are fighting a perception battle too. How are you marketing your products?
DM: Our biggest marketing tool is word-of-mouth. With a Chinese brand, there is going to be an initial hesitation amongst car buyers. I can go out and launch the fanciest marketing campaign right now but until the community gets customer and user feedback, nobody will make a purchasing decision just based off of an ad campaign. For all of our products, the word-of-mouth has been one of the key drivers for our sales and our strategy. Once we get the word-of-mouth going, the product is accepted into the market. With Alsvin, we did launch a 360-marketing campaign that included TV, radio, billboards, the works! We curated our advertising to the Pakistani audience. For the SUV, we want the vehicle to be in the hands of the customers as soon as possible to establish that market acceptability fast.
BRR: The auto policy 2016 seems fairly successful in its mission to bring more brands to the market, though not necessarily the volumes. How do you see the new policy for 2025? Do you feel its primary aim to promote localization can actually happen in Pakistan given the stagnancy in volumes?
DM: With the Auto Policy 2016, there came new entrants and new choices. However, the overall market needs to substantially grow. Pakistan’s market in 2020 was 168,000 units and in 2021, we are closing at 310,000 units. In 2022, we are expecting about a 20 percent increase—about 373,000 units. Within that, the volumes are divided amongst different brands. We need to touch 500,000 units within the next couple of years to start achieving a considerable level of localization.
As the 2016 policy retires, the government is coming up with a new policy focused on exports, localization, new energy vehicles as well as bringing small cars to the market. At the outset I would say that now that so many new entrants have launched products, they should be given the time to breathe and localize because localization does not happen overnight. The incentives that were promised in 2016-2021 should not be diluted and overshadowed by another aggressive policy.
Then the policy aims to promote small cars for which the government has announced incentives. These incentives however are targeting small cars in the 850ccand below category. The biggest concern here is that globally such small-sized cars are extremely limited and are being phased-out of markets. I would say there are only two companies in the world that are making 660cc size engine and out of those, one is in Pakistan. Then there are markets like India for instance, where small cars exist but that is because they are produced in India. The Indian market size is large enough for those OEMs to locally manufacture those engines. Once those volumes arrive, the engines can be domestically produced because that requires massive investments. We have to be cognizant of that. The incentives in the small car category should be expanded to 1000cc engines within that policy framework. That will give other companies a fair chance at bringing in those 1000cc or below cars that are accessible to the Pakistani consumer. The policy needs to be more inclusive which would bringmore options and choice to the customer.
BRR: Why are we not following the Indian model to localize the engine? After all, wouldn’t that bring true localization to the market, and also substantially cut down on the import bill?
DM: We have to appreciate ground realities. Today, Pakistan does not produce automotive level steel or automotive level plastic billets which are used for auto-grade plastic parts. We do not have the R&D to design an engine for assembly later on. Engine design costs a huge amount of money. Without the auto-grade raw material, we are importing these. True localization and indigenization in vehicles can only happen once we have the capacity to produce those raw materials and inputs. On that side of the supply chain, these raw materials require heavy investment from steel and plastic makers which they would be willing to make if there was a market for it and they knew they would be able to sell them. They are making rebars because there is a huge market for rebars. But if they were to make an investment for automotive level steel, they would need those volumes. The volumes, as we know, are too low. The feasibility is not there. It is going to take a multi-pronged long-term strategy and for that, we require a national level direction that brings all auxiliary industries on board.
What are exciting right now though are the incentives for Electric Vehicles cars and scooters that are electric-first. We are definitely behind in the race when it comes to engine or transmission technology but we can get quickly ahead in the race for electric technology. EVs are going to be the prominent mode of transport and if that is indeed the future, I don’t see any point to invest in an engine-based Pakistani vehicle. We should channel new investments in the electric-first Pakistan-branded automobile, similar to Turkey with TOGG and Vietnam with VinFast. Most companies right now globally are importing batteries from China but eventually these can be locally made. Pakistan can invest in motor tech first and then battery later on, but this is the more logical and future-proof approach for the Pakistani automobile industry, as I see it.
BRR: How will this investment in EV-first Pakistan car come in? Is there even a market for electric vehicles in the country?
DM: Market development will take time. The EV market is very small and at this time, we don’t have the charging infrastructure in place. I see the market developing in phases. At first, the more expensive EVs will come in and establish their market. This will be for the informed and more affluent households who are willing to take the risk on EVs. They would buy it as a second or third car. Then, over time, the charging infrastructure will be developed because there will already be EVs on the road. I would add here that it is easier to build up a charging infrastructure than it is to set up a petrol station. Secondly, as a country, we have a lot of hydropower. Solar and other renewables are also coming in.
At Master Group, we have invested heavily in wind and have 100+ MW of wind power generation. At Master Changan our factory currently is 30 percent powered by solar which will be 60 percent next year. These renewables will be able to power the charging infrastructure so there are environmental benefits on that front. As this infrastructure develops, we will be able to get into the more accessibly-priced lower-end EVs which can come into Pakistan. This will establish volumes and the natural step would be on getting those volumes and making Pakistan’s first electric vehicle. That’s how I see the industry panning out in terms of EVs. All this will have to be supported by a consistent and comprehensive policy approach on the government end.
BRR: The new policy also wants to export vehicles. Do you see that happening?
DM: I think, the government should really push all the OEMs to export and it can happen. We will have an installed capacity of over 500,000 units and the market is at 350,000. We have idle capacity. Either the government brings down duties and taxes to enable assemblers selling these units locally or export them out. Once we start exporting and building international markets, more investments can come in. We need to hit the 500,000 unit- threshold whether locally or abroad to get that volume momentum which will help us to go into the next phase.Master Changan is the right-hand-drive (RHD) export hub for Changan vehicles from Pakistan to the world and we are the only OEM which was conceived with a vison to export. We have the principal brans permission to export vehicles from Pakistan so I definitely see it happening.
BRR: The auto market has been trying to achieve this proverbial goal of 500,000 units for many years now. But the goal-post seems to be moving further and further away as cars are only becoming more expensive. What is your outlook for industry size considering this?
DM: Moving forward, vehicles will become more expensive considering rising interest rates, rising freight and supply chain challenges, coupled with taxes and duties being raised. We are not going to see a year of tremendous growth right now but incremental growth. But here is where we see a unique opportunity with Changan. As a company, we provide in all our products the best value to the customer. We want to maximize value on the purchase and we expect customers now as vehicles become pricier to move from paying hefty brand premiums and instead use Changan products that have superior built quality and deliver unprecedented value across our diverse portfolio.
To support this, we have a strong dealership network in place at 22 dealerships across 16 cities and we are expanding itby 30-40 percent. We have mega dealerships in cities like Multan, Sahiwal, Jhelum, Sialkot and Sukkar where we are very prominent. We are in the rural belt of Pakistan and we see the volume shift coming here. Customers in the rural areas are buying more cars as they are more isolated from our economic shocks. That agri economy is a growing market for us. We have seen explosive growth in our commercial products for transportation and Karvaan which has performed tremendously in inter-city travel.