Battery Industry in Pakistan – A Comparative Study

The Battery industry is totally dependent upon the automobile sector, where the demand for batteries is directly related to the growth and demand of automobiles. Pakistan Auto industry has long been termed a stagnant sector because sales have never picked up beyond a certain level. With just three major players catering to the domestic car market one can see that it is not a very large market either.

The total demand for Automotive Batteries was estimated to be around 1.56 million units during 1997-98. This is expected to increase by 8-9 % during 1998-99 due to the overall improvement in economy.  Of this demand 70% was met by the organized sector and the gap was filled by smuggled and re-plated batteries.

The main players in the Battery Industry are Atlas Battery Limited (AGS), Volta Batteries, FB Batteries and Exide Batteries. The market shares are 50% Exide, 35% AGS, 15% FB.

 

• Volta Batteries during 1998-99 put up their manufacturing facilities with the significant advantage of sales tax exemptions. Thus, they are able to compete in the industry but are not considered as a major threat to Exide. With no technological back up and insufficient resources, they will find it almost impossible to maintain the competitive edge particularly under the sales tax regime.
•  AGS in the recent past appeared to have moved ahead at a much faster rate than Exide. Never in the last three decades the position of Exide was so seriously threatened as it is today. This is because of various reasons. Firstly, the have technological and operational support from GS Japan, with frequent visits from Japanese engineers to overview their operations. Secondly, their dealers are considered to be the most loyal in the industry. Thirdly, they have increased their installed capacity.
•  FB is a sister concern of Exide Batteries, where Exide took over FB in 1992. In 1998, the link was severed, however the top management is the same but the two companies are operated as separate entities. FB has invested heavily in balancing, modernization and expansion of plant and machinery, over the past years. This is intended to increase production volume, quality and market share. All these factors combined have the potential to threaten Exides’ position as the market leader.

Technological Environment

The Battery Industry is a reflection of obsolete technology. All the players in this sector are using outdated methods and means of production. Moreover, the local culture is not conducive towards research and development. The companies that are associated with Japanese firms have the added advantage of spill over technology effects, with the exception of Exide Batteries that has no foreign association.  FB projects itself  as a company using Japanese technology  in its manufacturing operations, however, this is not the case. The batteries have Japanese signs printed on them to mislead the ignorant customers, however the batteries are locally manufactured with the help of local technology.

 

Political and Legal Environment

The industry does not face any specific government regulations. It is expected to benefit from reduced excise duty on import of raw materials, which has been reduced from 20% to 10%. Sales tax has also been reduced to 12.5% from 18%.  This reduction will affect the price structure of all the batteries available in the market.

The cost structure of the industry is such that 30% of the revenues generated go to the government. Thus, the biggest problem that the industry faces at this moment is that of taxes. The break up of these taxes is as follows; 15% Sales tax, 10% Excise duty, 5% Iqra charges on imported raw materials. However, certain duty exemptions are granted on the import of new machinery, but these remain unavailed.

As far as the present political scenario is concerned, it is strife with uncertainty and ambiguity. The change in status quo from Democracy to Marshall Law has plunged the entire country into a period of concern. The policies of the new government are as yet unknown and the withdrawal of the financial support from International institutions will have far reaching effects on the economy.

 

Socio-Economic Environment

The economic downturn for the past decade has adversely affected the purchasing power of the individual as well as the industrial consumers. The battery is divided into three sectors, where the target market consists of Replacement sales, Original equipment and Defense and Government. Adverse economic conditions have resulted in fewer industries being set up, which in turn has contributed to the decline in the

growth of sales of industrial batteries. Moreover, persistent fiscal deficit has resulted in fewer purchase orders from the Government and Defense agencies.  All these factors have accumulated and the result is that for the first time in the past decade, a negative trend in the demand during the peak season for batteries has been observed.

Furthermore with the increase in distances and population, cars have become a need rather than a necessity. Moreover luxurious cars have become a status symbol in our culture, which has resulted in a subsequent increase in demand of cars and correspondingly batteries.

 

Internal Environment

Value Chain

The primary activities include:

1. Works / Production

Strengths

Maximum capacity utilization

Exide enjoys 40% share of the total industry’s installed capitalization.

Weakness

• Obsolete plant and machinery.
• No flexible manufacturin system or statistical process control technique are applied.

1. Quality Control

Strengths

• Exide is the first company to acquire the ISO 9002 Certificate. This helps to enhance the brand image of their batteries.
• Superior product quality.

Weakness

• Random product inspection which leads to higher probability of defected units going in the market.
• The responsibility of quality control is assigned to one department, instead of making it the responsibility of the whole company.

1. Marketing

Strengths

 

• Exide is the market leader and has the added advantage of becoming the generic name in batteries.
• The company has the largest network of dealers with direct representation in major cities and a trained sales force.
• The company offers the best terms in after- sales service, with regular training sessions and seminars held for the dealers and shopkeepers.

Weakness

• Loyalty of dealers is questionable.
• Unnecessary intermediary costs, since the company itself is undertaking an aggressive marketing strategy.
• Rigid marketing strategies, with no considerations made for the differences in culture, race, education, background, etc.

 

The support activities include:

1. Finance

Strengths

• Higher profitability due to decline in the prices of virgin lead and polypropylene.
• Drastic increases in the share holders equity in the last 5 years, from 162 million to 255 million indicating a strong capital base.
• Effective internal audit system.

 

Weakness

• Declining cash flows, which would make payment to creditors a difficult task.
• Higher overheads as compared to competitors.

 

1. Personnel

Strength

• Lower employee turnover.
• The organizational culture, which was a direct result of the association with the British parent company, has been retained.
• Policy of relating rewards to performances, rather than to experience or seniority.

 

Weakness

• Resistance to change and stifling of innovation, due to a lack of new blood being introduced in the company.
• Lack of trained and qualified divisional level managers.

 

Financial Analysis

Problems

The problems faced by the industry as a whole and by Exide Pakistan as a company, are innumerable. They can be categorized as the major and minor problems.

The minor problems can be listed as:

• Inadequate HR management

The recruitment policy of the company discourages inducting new blood into the organization. The top management does not hire highly qualified personnel because of the insecurity and lack of confidence in their abilities. All this hampers creativity , involvement and use of new technology and methods to achieve corporate objectives.

 

• Inefficient methods of production :

The company incurs high manufacturing overhead expenditures and inventory carrying costs due to the use of  outdated technology used in the manufacturing process as well as due to obsolete plant and machinery which dates back to early 1960’s . Moreover, the company does not  statistical process control technique or flexibile manufacturing systems which could help in economizing various overheads . The root cause of this problem is their inability to access improved technology from time to time.

 

• World Trade Organization

In the year 2001 when all barriers to trade are abolished and free trade becomes the order of the day, companies like Exide will suffer enormously. The company is not adequately equipped to handle competition on a domestic basis and if exposed to the high standards of international competition, the survival of the company will be threatened.

• Lack of definite Industrial Policy
• Derived Demand
• Devaluation increases the cost of production
• Smuggling results in severe competition

In the year 2001 when all barriers to trade are abolished and free trade becomes the order of the day, companies like Exide will suffer enormously. The company is not adequately equipped to handle competition on a domestic basis and if exposed to the high standards of international competition, the survival of the company will be threatened.

• Devaluation

The battery industry as a whole is facing increasing costs of production, due to frequent and drastic devaluation.

• Smuggling

A major threat to all battery manufacturers is that of smuggled batteries, which are foreign in origin and sold at lower prices than the locally manufactured batteries.

 

Major Problem

• Access to technology

Initially, when Exide was associated with Chloride England, there was a free flow and transfer of technology from the parent company to the subsidiary. However, after the break up, Exide became a totally independent Pakistani company. Subsequently, it lost its edge with regards to all updates on technological competencies.

Moreover, Exide’s main competitor, AGS is associated with the formidable GS- Japan.  Thus, they are continually benefiting from the support and presence of Japanese engineers, overviewing the manufacturing operations.

This has been a major factor in contributing to the decline in sales growth in the last 6- 7 years, for Exide batteries.

 

Demand Drivers

 

• New Vehicles

Vehicle demand in the country has posted a CAGR of 7% over the last ten years. With a forecast average GDP growth rate of 5%+ p.a. over the medium term, the demand for cars is expected to grow at a rate of around 8.5%. Pakistan has one of the lowest number of vehicles per capita among the developing countries which is 6 cars per 1000 cars therefore offers a lot of room for demand growth. The upper segment of the market is expected to grow at a slower rate at around 5%-6%, while the lower segment of the market is expected to grow at a rate of 12% p.a.

 

Each year around 50,000 vehicles are produced annually. Hence there is a derived demand for 50,000 new batteries each year.

 

• Replacement of Batteries

There are around 3 million vehicles registered in Pakistan. These vehicles require a new battery after two and a half years, which is the optimum life of a battery.  Replacement makes up for over 90 % of the total demand for automotive batteries.

 

• Increased Economic activity

Improvement in the overall economy is expected to increase the industrial demand for batteries as the confidence of investors is expected to increase investment in the country. The improved economic scenario will also have an impact on the overall demand of automotive batteries. Due to the increased economic activity disposable income of people would increase thus increasing the demand of new cars.

 

• Influx of Smuggled Batteries

The influx of cheap smuggled batteries remains the largest threat to demand of batteries produced by the organized sector. The government’s policy to counter smuggling is bound to have a favorable impact on the demand for batteries produced by the organized sector

 

• Use of Batteries in UPS

Use of automotive batteries in UPS (Uninterrupted Power Supply) is also an important driver of earnings. The increased use of UPS by the organizations for their computer department may increase the demand of the batteries. But the current usage of batteries for UPS is less than 1% of the total market demand. Therefore the impact of this factor is not expected to affect the overall demand of the batteries in the next 2 years.

 

Supply

 

The installed capacity of the industry in the organized sector is 1,350,000 units. The unorganized sector is not less than 30% of the total capacity. Irregular imports through currently reduced duty and taxes, continued under-invoicing, imports through Afghan Trade Transit and the production of the so called cottage industry are in addition.

 

The Automotive Batteries industry is divided into two sectors, the organized sector and the informal sector.  During 1996-97 the organized sectors share in the market was estimated to be at 70% of the total Automotive Battery market.  The organized sector comprises of four listed companies. Of the four listed companies Exide and its subsidiary Automotive Battery has 70% of the organized market share. The Market share of Exide stood at 52 % and is expected to increase in 1999.

 

The informal sector includes smuggled batteries and replated batteries. Due to the opening of Afghan Transit Trade there was an influx of smuggled batteries in the country. There is also a new variety of batteries available which is maintenance free. But the supply of such batteries is not an immediate threat to Atlas.

 

Regulations

 

The company does not face any specific government regulations. The company is expected to benefit from reduced excise duty on import of raw materials, which has been reduced from 20 % to 10%. Sales tax has also been reduced to 12.5% from 18%.  This reduction will allow the company to reduce its prices and become more competitive.

 

Advantages

 

• Market Leader

Exide is the market leader of the automotive battery industry. It has around 50% of the organized market share. The market share of Exide is expected to grow to 54 % during 1997-98 as Exide has reduced the prices of  its batteries in order to under-price the smuggled batteries, which is expected to increase the size of  the organized market size by 4% point.

 

• Owner of Subsdiary Company

Exide Battery has got 58% shares of Automotive Battery Pakistan Ltd. This company is the subsidiary of Exide. Automotive holds about 15% share of formal market. This makes the total share of Exide to about 70% of the formal sector.

 

Demand

The total demand for Automotive Batteries was estimated to be around 1.24 million units during 1996-97. This is expected to increase by 11 % during in 1997-98 due to the overall improvement in economy.  Of this demand 71% was met by the organized sector and the gap was filled by smuggled and replated batteries.

 

Demand Drivers

 

• New Vehicles

Each year around 50,000 vehicles are produced annually. Hence there is a derived demand for new 50,000 new batteries each year.

 

• Replacement of Batteries

There are around 3 million vehicles registered in Pakistan. These vehicles require a new battery after two and a half years, which is the optimum life of a battery.  Replacement makes up for over 90 % of the total demand for automotive  batteries.

 

• Increased Economic activity

Improvement in the overall economy is expected to increase the industrial demand for batteries as the confidence of  investors is expected to increase investment in the country. The improved economic scenario will also have an impact on the overall demand of  automotive batteries. Due to the increased economic activity disposable income of people would increase thus increasing the demand of new cars.

 

• Influx of Smuggled Batteries

.The influx of cheap smuggled batteries remains the largest threat to demand of  batteries produced by the organized sector. The government’s policy to counter smuggling is bound to have a favorable impact on the demand for batteries produced by the organized sector

  

• Use of Batteries in UPS

Use of automotive batteries in UPS (Uninterrupted Power Supply) is also an important driver of earnings. The increased use of UPS by the organizations for their computer department may increase the demand of the batteries. But the current usage of batteries for UPS is less than 1% of the total market demand. Therefore the impact of this factor is not expected to affect the overall demand of the batteries in the next 2 years.

 

Supply

 

The Automotive Batteries  industry is divided into two sectors, the organized sector and the informal sector.  During 1996-97 the organized sectors share in the market was estimated to be at 71% of the total Automotive Battery market.  The organized sector compromises of four listed companies. Of the four listed companies Exide and its subsidiary Automotive Battery has 70% of the organized market share. The Market share of Exide stood at 52 % and is expected to increase in 1998. The informal sector includes smuggled batteries and replated batteries. Due to the opening of Afghan Transit Trade there was an influx of smuggled batteries in the country. There is also a new variety of batteries is available which is maintenance free battery. But the supply of such batteries is not an immediate threat to Exide.

• Technological
• Competitive
• Regulatory/ Govt.
• Economic
• Social, cultural, demographic