The world of cars is in a constant flux. The automakers world-wide are evidently pulled towards creating more technologically driven models, moving from combustion engine onto batteries (read: “The future of mobility”, Jan 31, 2018). The future holds a boom of electric cars, driverless cars, connected cars, even flying cars which would go hand in hand with an evolution of the transport infrastructure. This is one of the reasons why there is an increased focus of some automakers to invest in countries still using traditional technology where demand is palpable and ready to be absorbed. It seems Pakistan is one of those countries.
The new auto policy with its five-year incentive structure and no localization targets is considered to be the main impetus for the likes of Hyundai, Kia, Nissan, and Renault to invest in the automotive industry (read: “Hyundai in Pakistan-again”, Dec 20, 2017).
For the first time in history, the existing Original Equipment Manufacturers (OEMs) sold over 200,000 cars in a year. This was not only a function of stronger appetite, but also factors like higher car financing boosted by low interest rates, and the introduction of new variety of vehicles across different segments. New automakers see a huge demand-supply gap that can be filled as the existing capacity of automakers is simply insufficient to cater to the sheer organic demand.
The latter is why used cars have gained such a market share (they are nearly 40% of locally assembled cars currently). Meanwhile, the number of people buying their cars on premium from investors to get their cars on time shows the incremental price car buyers are willing to pay.
While incoming newcomers is all fine and dandy, there is a profound fear in the market that new automakers would come in, enjoy the concessionary five year period by assembling with imported content, and exit the market.
There have been examples of carmakers in the past whose failure to launch makes stakeholders question the survival of the new breed of assemblers. There is that example of Nissan Sunny under collaboration between Ghandhara and Nissan Motors. The car has a short, intermittent but memorable history. Between 1997 and 2005, the plant manufactured merely 2,573 cars and sold even less (1,158 units). Low volumes led to the inability of the company to meet localization targets (read: Nissan: Second time’s the charm, April 4, 2018).
Nissan’s failure stemmed from its high price tag, slowing demand, poor marketing, and low resale value due to restrained volumes. The fact that it couldn’t meet the deleting targets was a big contributor to why it couldn’t survive. Hyundai was also in the market before with Dewan Motors as its local partner. The car was discontinued largely because Dewan went through major financial setbacks.
History shows the preparedness of local partners (or lack thereof) is pivotal to the survival (or lack thereof) of that brand. Incoming investments in building the new plants and infrastructure need to go in tandem with a strong distribution network and vendor base. In fact, auto parts manufacturers need to put in the investment and work as well, in training and gaining technological expertise on the new brands.
In an interview with BR Research, Norez Abdullah, CFO of Hyundai-Nishat argued that it would be preferably for new auto assemblers to localize from day one and that is Hyundai-Nishat’s target. There is no question of surviving beyond five years with no localization as the investment is not recoverable by that time.
If new assemblers are coming in for the long haul, the future of the industry over the next decade is indeed promising. Greater competition will tackle the quality concern of car buyers. That together with adequate localization may eventually lead to competitive pricing as well, though price war is not the main strategy of any new assembler, neither it should be. That should be a function of demand, supply and healthy competition. A major target for assemblers should be exports and entering regional and global value chains.
Comments
Comments are closed.