What is the most quoted statistic in Pakistan about the domestic automotive market? Unsurprisingly, it is not the annual production of cars in the country, a number that does not inspire too much confidence. It is in fact, the low car ownership per capita in Pakistan (18 vehicles per 1000 people) compared to emerging economies which is used to make a case for new automobile investments flowing into the country. In 2016, the then-government introduced an auto development policy hoping to expand to attract new investors. The policy has since achieved fruition, translating into several new automobile entrants dipping their toes in the proverbial pool of opportunities. Truck manufacturer Master Motors is one of them.
With an investment of $100 million, Master Motors has joined hands with Chinese giant Changan to introduce the brand's passenger vehicles and light commercial vehicles to the Pakistani market. BR Research sat down with Danial Malik, CEO of Master Motors on a virtual Skype call to learn about the company's plans; where he sees the industry moving and whether he thinks it is moving in the right direction.
Below are edited excerpts:
BR Research: Tell us about the group and how did the Masters Motors and Changan partnership come about?
Danial Malik: Master group started in 1963 and has 16 manufacturing facilities all over the country. It has commercial interests in textiles, chemicals, automotive, engineering, power generation, retail, and furniture segments. We entered the automotive industry in 1988 with a company called Procon Engineering which making automobile seats. Today, it supplies over 500 different automobile parts major OEMs in the country. We proudly claim that 15 percent of every car made in Pakistan is made of Procon parts.
In 2002, Masters Motors Corporation was established to manufacture commercial vehicles in Pakistan. It assembles light, medium, and heavy-duty trucks under technical agreements with Japanese Mitsubishi Fuso and Chinese Futon Group. The company also entered the luxury bus segment with Yutong which is the world's largest bus manufacturer in the world and is the leading Chinese bus company. This is the first locally produced Chinese bus and within three years has captured 70 percent market share from competitors such as Korean Daewoo and Japanese Hino.
Appetite for high-quality products in Pakistan is big. We do not sell our product cheaper than competition but offer more value for money. We found that inter-city passengers were willing to pay more to travel in a Yutong bus, so the revenue of the transporter has increased as well.
When the new policy came, we entered a joint venture with Changan. Changan is the largest automobile brand in China. It spends the most on R&D and has technology partnerships with Huawei and other tech companies. Within 13 months, we set up our plant and launched the greatest number of variants that any new entrant has.
Of those, two pickups and a van are manufactured locally. Plans for launch of three more vehicles are in the offing. Installed capacity for commercial and passenger cars assembly is 30,000 units — about 3500 are produced currently. We plan to take our volumes to 21,000 in the next five years.
BRR: What factors, other than low motorization rate, attracted Changan to Pakistani market?
DM: Market research suggested that Pakistani auto industry would grow to 500,000 vehicles per year. This is a very capital-intensive industry, but we received tax incentives for five years under the new auto policy. These incentives have given the space to compete with existing players and has provided us with the time to localize. Getting product positioning right has helped increase demand.
BRR: How do you position a Chinese product in a market that has been dominated for several decades by Japanese cars and will now also face competition from major Korean players such as Kia and Hyundai?
DM: It is a myth that Chinese products are low quality. You can get any kind of Chinese product - depending upon the price you are willing to pay. In the past, automotive companies brought low-end Chinese products in the market which tarnished the image of goods of Chinese origin. Our business model is to partner with the best auto company in every segment. We have done that before with Futon and Yutong and now with Changan.
Right now, the customer lacks choices. In addition, vehicles in Pakistan are awfully expensive and are not accessible. Our goal is to bring quality vehicles with features that the customer could not previously afford.
BRR: What is the buyer profile for your existing offering — the 7-seater van.
DM: It has two very distinct buyers. The first segment is families. Pakistan's average family size is about 6.4 so the van caters perfectly to a typical Pakistani family. For individual business owners, it is a multiple purposes vehicle, such as school pick-and-drop services, Uber and Careem etc. Business customer insight has revealed that they are generating more revenue since vehicle purchase. People are willing to pay more to use our vehicle. This is especially seen in Punjab where our van is used for both inter- and intra- city/village travel. This has created opportunities for van owners to not only earn more but also expand their business.
So far, we have not invested in marketing. Products have gained acceptance through word of mouth. The fact that we have bookings for the next three months is testament to that. Our customers are our biggest salesmen at this point.
BRR: Carmakers have been raising prices every few months. In fact, some variants have witnessed a price increase nearly a dozen times which cumulatively is a huge hike from just two years ago. What is your price strategy?
DM: In the past, consumers did not have many choices. The local market was oligopolistic. That is changing with new entrants and new models coming in. Once the customer has more choice, it will lead to competition among manufacturers. Over time, OEMs must be competitive in product quality, price, features, and performance.
In terms of pricing strategy, we are excited about bringing accessible products. We are very customer centric. We have studied the market deeply and identified the gaps. Previously, customers were getting a smaller vehicle with few features and yet paying a premium for the brand. Today, we offer the customer a bigger vehicle with more features at the same price point.
We may not have the brand equity of Toyota, Honda or Suzuki but with the current economic environment, we have a great opportunity on our hands. The customer will think twice before purchasing a vehicle. They will not blindly go after a brand but think how their money could be put to best use. When that question comes up, I am confident that they will go for a Changan product.
BRR: What are your localization levels right now and is localization a business target for your company at all?
DM: I am a huge proponent of make-in-Pakistan. To be successful, automotives must localize aggressively. In the long run, localization will protect us from currency volatility. It will also provide more accessible vehicles to Pakistan and give a fillip to manufacturing and engineering base of the country. Localization is the most important factor in the success of any new automobile entrant.
With our expertise and history in parts manufacturing, we have aggressive localization plans. Within the first two years of launching our products, we plan to localize about 30 percent and by the end of our greenfield period, we plan to have at least 50 percent of the vehicles produced locally, utilizing both our sister concern Procon Engineering and other auto vendors throughout the country. We have a strong vendor base and we plan to work very closely with our vendors to make them partner with Chinese auto parts manufacturers, bring their technology, and produce the parts locally. We are encouraging local vendors to sign technology transfer agreements with Chinese counterparts them.
BRR: Parts that Pakistani vendors manufacture are low-tech and serve cosmetic functions of vehicles while we have limited capabilities to move up the value-chain in terms of technology. Do you see that changing?
DM: Localization is directly related to volumes. Technical parts manufacturing requires huge investments. Those are only feasible at high volumes. It is a chicken and an egg problem. Technical partners will come in once they see volumes growing. Over the past year, volumes have been highly volatile. For OEMs or vendors to make those investments right now does not make economic sense.
BRR: Volumes can be achieved if for instance if Pakistani vendors were to enter global or regional value chains for major automakers (Changan is certainly a big one) which would automatically raise demand as vendors will cater to demand for larger volumes from different markets.
DM: We require two things to make this happen. The government needs to bring a policy to incentivize automotive parts companies to make investments in new export-oriented technologies. This policy will be a necessary step to boost Pakistani parts industry. In terms of attracting volumes, we have the capacity to cater to both domestic and exports. Other OEMs do not focus on exports because they do not see Pakistan as a regional production base. Existing OEMs have already set up production hubs in other countries. Toyota for instance, has picked Thailand as their export base
We are in a unique position because we have been chosen by Changan to be the export hub for right hand drive (RHD) vehicles. Since China is a left-hand market, they are converting vehicles especially for the RHD markets. We will be exclusively producing these locally and export them to other RHD markets. We will be able to do that when we are competitive, especially in terms of price. That will only come through localization. That is another major reason why we are aggressively investing up front in localization and working with vendors so closely. We see this as a key strategic driver for us in terms of growth.
Remember, Changan and Master Motors is a joint venture (JV). Changan makes money when we make money in Pakistan. They have an incentive to reduce the cost of vehicle and generate volumes in Pakistan to turn a profit. If you are not a joint venture, the principal makes money when they sell you the kit. The more kits they sell, the more money they make. If you localize, they sell you less. To have aggressive localization targets, you must have your principal on board with you on this journey. Through the JV, we have that.
BRR: From a policy perspective, how consistent has the auto policy been so far?
DM: When the new policy was announced in 2016, the government promised that no regulatory changes would be made until the policy period was over to protect the investments of new entrants. But right now, new entrants are struggling because the government did not follow through on that commitment. Additional custom duties were imposed and federal excise duty (FED) was increased during the previous budget. These have not only brought down the volumes of existing companies and made vehicles more expensive but have also slowed down the growth of the new OEMs.
We are happy to pay taxes. When volumes go up, the government will also receive more revenue. Levying indirect taxes to generate revenue cripples and shrinks the size of the industry which will in turn make it difficult for the government to generate tax revenue. The only long-term revenue driver is direct taxation through an increase in overall vehicle sales in Pakistan.
This has been a struggle for new entrants who have invested heavily into the industry. Changes and uncertainty in policies makes it difficult for companies to plan and effectively manage their business plans and cash flows which in turn discourages future investments.