Reports

Pakistani Auto Industry: Finance Report

by Ravi Magazine · 28th November 2015

auto industry pakistan

Pakistani Auto Industry: Finance Report

From a non-existing industry at the time of creation of Pakistan, automobile industry is now producing 40,000 cars and commercial vehicles. Local car industry is paying Rs. 5 billion as Duty & Sales Tax, is saving Rs. 1.5 billion of foreign exchange and providing jobs to about 100,000 people directly in vendor industry and 400,000 people are indirectly employed in allied industry. At present there are twelve automobile units in existence. Out of these twelve, seven units are in operation while five have yet to start production. The local car and light commercial vehicle assembly industry consist of four local manufacturers. All four assemblers are joint ventures between Japanese car manufacturers and local partners. Pak Suzuki Motor Company (PSMC) was the first company to start local assembly in 1983. Being the only company in assembling field, PSMC has enjoyed monopolistic position for many years but now with the entry of new companies like Honda and Toyota in early 1992, PSMC faces fierce competition in high capacity cars. Even in economical sector fierce competition has erode as Kia 1000CC production has started.

Market Growth and Projections:

The historic demand for cars and LCVs has been growing at a rate of approximately 9.5% p.a. over the past five years. The 8th five year plan (1993-98) envisages GDP growth rate of 7%. Average GDP growth rate of 5th, 6th and 7th five year plan was also about 6.5% per annum. Looking at the historical data, a 7% GDP growth rate can be forcasted. Market projections for period 1995-2002 based on 10% growth rate is shown as in table00

TOTAL MARKET PROJECTION 1995-2000

1995 1996 1997 1998 1999 20000

40000 44,000 48,400 53,240 58,560 64,420

Production and Production Capacity

Being domestic demand driven industry one can observe wide fluctuations in the production of the automobiles in the country. Historic data of production of automobiles shows that production has increased tremendously from 1974 to 1990 (Graph 4). However, the industry has faced crises in the last two years when production plummeted to only 16,022 number of vehicles. Although units production in all the categories can be observed but major boost in production occurred in the cars and motor cycles and mostly it is due to the start of the Suzuki’s production in Pakistan in 1983-4.

Assemblers are not producing at their potential full capacity as the local demand is less than installed capacity of the assemblers. Due to this reason assemblers faces the problem of under-utilization of their production capacity (see table 19). For example, Atlas Honda is producing about 20% of its capacity. Similar percentage can be observed in all other assemblers except PSMC who is producing more than 60% of its capacity. PSMC has been able to attain 60% of its capacity due to the fact that it enjoys the monopolistic position in low CC or economical cars which is the dominant segment of the car industry in Pakistan.

UNITS	MODELS	CAPACITY	PRODUCTION

ATLAS HONDA	HONDA	10,000	2,348
INDUS MOTORS	TOYOTA	20,000	4,611
PAK SUZUKI MOTORS	SUZUKI CARS AND JEEPS	50,000	30,000
NIA DAUR MOTORS	KIA	10,000	–
HINO PAK	HINO TRUCKS	5000	1861
GANDHARA NISSAN	NISSAN BUSES/TRUCKS	2500	1200
NATIONAL MOTORS	ISUZU TRUCKS	4800	1993

Imports

Imports of automobiles have increased manifold during the last four years rising from Rs. 7.994 billion in 1990-91, Rs. 9.682 billion in 1991-92 to Rs. 23.976 billion in 1992-93. Increase in imports of passenger vehicles during 1992-92, into Pakistan is mainly attributed to Prime Minister Public Scheme which also continued during the year 1993-94. In 1992-93 around 22,000 units mainly Hyundai and Daewoo were imported under above scheme. Import in 1993-94 has ecline to Rs. 12.976 billion. Same trend can be observed in the production of automobiles in Pakistan from table 8, in which production, import and sales of automobiles from 1974 to 1993 are presented.

Pakistan auto industry is inherently a protected industry. The industry is heavily protected through a high import tariff differential between Completely Knocked Down (CKD) kits and Completely Build-Up (CBU) units and a ban on the import of used cars. However, since the industry serves the multiple purpose of reducing foreign exchange drains, developing the local downstream industry and job creation, the government needs to provide some form of protection to ensure its continued viability. Although import tariffs on importing CBU are quite high (from 100% to 265%) comparing to CKD tariff rates (32%) alongwith additional 15% import duty, but still imports are on the increase and furthermore, most of the imports are in CBU shape. Infect, out of total imports 68 % is in CBU whereas only 32% is in CKD condition as shown in Table 7. Within different categories of autos, in car sector 80% import is in CBU condition which is the highest whereas lowest import in CBU is in shape of Motorcycles in which it is only 8%..

Major Importing Country

Automobile market in Pakistan is dominated by Japanese makes, and is well accepted by the public. Recently due to devaluation of Pak. Rupee (Rs) the prices of automobile has roses tremendously especially of Japanese models. As a result a new market emerged; a low price market. Assemblers starts looking manufacturers other than Japanese. Most suitable what they found were Korean and Chinese. With these considerations, local companies enter into alliances with companies from Korea and China. One case of such alliances is that of Saigols and Hyundai Motors, who entered into Joint Venture Agreement for progressive manufacture & assembling of Hyundai Vehicles in Pakistan.

Japan is the main supplier of motor vehicles and components to Pakistan. Imports from Japan in 1991-92 stood at Rs. 8.219 billion which increased to Rs. 10.216 billion in 1993-94. This comes to 78.73 percent of the total imports of cars. The average passenger car imports of Pakistan from Japan for last 15 years are about 25,000 units/year and average imports fro last five years amount to 35,000 units per annum. Second largest suppliers of automobiles is South Korea. Three models of South Korean cars are on road i-e Daewoo, Hyundai and Kia. Imports from Korea stood at Rs. 730 million in 1993-94 as compared to Rs. 4,170 million in 1992-93.

These assemblers import Kits in Completely Knocked down condition from Japan and Korea and then assemble these kits, adding parts obtained locally. Local contents in the automobile vehicle range from 45% to 80% (as shown in table 8). The highest deletion achieved is in Suzuki Alto Air-conditioner, which stands about 50%. It is sad that capacity utilization in these plants is as low as 40%.

Pak Suzuki Motors, Atlas Honda Motors and Indus Motors have already set up their plants and are operational. Ghandhara Nissan Ltd. is the latest addition. It has facilities for production of Nissan range of cars including Sunny at their existing plant at Karachi. Naya Daur Motors under the management of Tawakal Group has booked orders for 24,000 Kia Pride 1000CC cars.

Among the perspective producers, Hyundai has signed an agreement with Chakwal Group for the manufacture of their cars in Pakistan. Pent Motors plant is also still in project planning stage for the manufacturer of Chrystler Model cars.

Vendor Industry & Deletion :

In engineering industry the Original Equipment Manufacturers (OEM) traditionally undertake to draw, design and produce just a small number of critical parts, the remaining parts generally from 80% to 90% are undertaken to the ancillary industry, sub-contracting and vendorization. Nowhere in the world engineering industry developed without it. Automobile vendor industry in Pakistan started with in-house production of low tech bulky items like seats, with the passage of time and as the industry grew assemblers realize the benefits of the indigenous production of selected non-functional items and the vendor industry start emerging.

With the introduction of deletion policy by the government in late 60’s and the formation of PACO in 1973, things started to change rapidly. The assemblers were asked by the government to give deletion programs of in-house deletion and those through vendors. Companies also started thinking about localization and deletion for the very first time. Gandhara Motors successors to General Motors & Sales Co., were the first assemblers to embark upon local development of Bed Ford Trucks and in 1966 they chalked out a deletion program. Kandawala industries also established in-house sheet metal, pressing and dye-making facilities. Mostly, other assemblers continued with SKD assembly. Existing deletion policy was given by the government in 1987 and more than 700 deletion programs have been implemented so far.

At present, as many as 22 assembly lines are engaged in assembly-cum-manufacture of cars, tractors, motorcycles, heavy vehicles etc in Pakistan. Currently, vendor industry has provided Jobs to 100,000 people with total investment in this sector of Rs. 8 billion and its contribution towards GDP is of Rs. 11.288 billion. According to PAAPAM, indeginization achieved by different products as of June 1995 is as in table 8. The domestic auto parts manufacturing industry is reportedly meeting the demand for parts and components from the local assembly lines, only to the extent of 24% while the target to be achieved by 2003, is said to have been fixed at 60%. This shows the extremely narrow range of parts manufactured locally.

The overall achievements in localization were not so remarkable due to the following reasons;

Lack of transfer of technology,
Low production volumes.
Absence of well-organized components manufacturing facilities.
Lack of suitable ancillary facilities like Forging, Casting etc.

INDUS MOTORS:

OVERVIEW (January 13): Year Ended June 30, 1997 — During the year under review, the company generated sales at Rs 4,534.42 million, gross profit at Rs 436.60 million and operating profit at Rs 289.12 million which improved by 9.6%, 9%, and 14.86% respectively.

Net profit at Rs 150.2 million (1996: Rs 187.23 million) declined by 20%. Both gross margin and net profit margin were lower than preceding year’s.

The management announced cash dividend at 15% which is in line with preceding year’s. Production at 7,341 vehicles improved from previous year’s 5812 vehicles.

The higher capacity utilisation was possible due to increase in sales of Toyota Hilux pick-ups and Toyota Corolla Diesel 2000cc.

The company has met deletion targets for the period under review. The company envisages to expand the present product range of seven Toyota Corollas.

New variants of Hilux will also be introduced.

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The company is engaged in assembling, progressive manufacturing and marketing of Toyota vehicles. The company has also acquired sole distributorship of Toyota vehicles in Pakistan, and is also engaged in marketing of imported Toyota vehicles.

It is a joint venture between the House of Habib, Toyota Motor Corporation and Toyota Tsusho Corporation. Indus Motor Company Ltd. was incorporated in 1989 at Karachi (Sindh) and started commercial production in May 1993. It was listed at the stock exchange in 1992.

Directors from the House of Habib are appointed as Chairman and Chief Executive on its Board of Directors. In addition, they have other directors on its Board. The Japanese counterpart are representing as Vice-Chairman and other directors and the company is mainly being run on the “guiding principles” of Toyota of Japan.

In the classification of shareholding eighteen foreign investors owned 65.7% stock of the company. There are 12,236 individual shareholders out of 12,308 total shareholders. These individual investors acquired 18.5% stock in the company. Twenty joint stock companies owned 7.2% stock and four financial institutions owned 5.2% stock.

At present share in the Indus Motor Company is trading at Rs 10.20 per share which is very close to its par value of Rs 10.0 per share. During the last 6 years between 1992 to 1997, the highest market value of its share was quoted at Rs 61.75 per share in 1994 and the present market value is almost all time lowest also signifies 83.4% diminution in the market value compared to its peak price in 1994.

The paid-up capital at Rs 786 million has remained constant since its listing at the stock exchange. But the shareholders’ equity rose to Rs 1,372.71 million by about 1.7 times of the paid-up capital.

Long term debts are small at Rs 123.2 million which further were reduced from Rs 190.15 million in the preceding year. Hence, there is excellent debt coverage position as also reflected in its debt to equity ratio of 8:92 which has further improved from preceding year’s 12:88.

The current ratio also signifies excellent liquidity position as reflected in the current ratio of 1.63. The balance sheet footing has also broadened by 9% over preceding year’s.

Stock-in-trade on the balance sheet date, at Rs 711.41 million went up by 38.2% over preceding year’s whereas sales revenue at Rs 4,534.42 million increased by only 9.63% only. Therefore higher inventory build-up is reflected in “Days Inventory” at 64 days compared to 50 days in 1996. However “Days Receivable” have significantly improved at 3 days only compared to the preceding year’s 15 days.

With the rise in sales, the gross profit, operating profit and profit before tax were also higher than the previous year’s. But gross profit and net profit margin’s were lower than previous year’s. The company generated net profit at Rs 150.2 million which posted 19.77% decline compared to the preceding year’s Rs 187.23 million. The present market value of its share and earning per share at Rs 1.91 placed price to earning ratio at 5.34. EPS at Rs 1.91 has dropped by Rs 0.47 from the preceding year’s Rs 2.38. The management recommended 15% cash dividend which is in line with the preceding year’s. This is the third time the company has paid dividend during the last 6 years since its listing at the stock exchange.

The company has produced 7341 units of vehicles compared to 5,812 vehicles in the preceding year’s and improved capacity utilisation at 36.7% compared to 29.06% in the previous year’s. Higher production is due to increased sales to Toyota Hilux pick-ups and Toyota Corolla Diesel 2000cc.

About the production Chairman, Ali S. Habib informed, “December 1996 saw another land mark with production of 20,000 Toyota vehicles. Also two new variants of Toyota Corolla, Corolla XEG and 2.0 DG, were successfully launched. With the introduction of these in the market, the locally produced Toyota product range has increased to six Toyota Corolla models and two Hilux models”.

PAK SUZUKI MOTORS LTD.

OVERVIEW (December 22): Year Ended June 30, 1997 — During the year under review the company achieved 3% rise in volume sales but recorded 2.45% decline in sales value.

The company’s production of vehicles increased to 30.513 thousand units from 28.040 thousand units in the preceding year’s. Nevertheless, the capacity remained grossly under-utilised due to sluggish demand. The management is thinking of exploring export market to improve capacity utilisation because higher volumes are necessary for the economies of scales. The market is becoming highly competitive with the entry of new auto-mobile assemblers and products. During the year, the company launched free service campaigns all over the country to combat the fierce competition.

To mark the Golden Jubilee of Pakistan, Pak Suzuki introduced the upgraded model of Margalla car with totally revamped interior and a modified exterior. The company’s profitability indicators declined but debt/equity and current ratios remained excellent. It generated net profit of Rs 391.4 million which declined by 31.9%. It proposed 20% cash dividend.

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The company was incorporated in August 1983 at Karachi, the capital of the province of Sindh. It started commercial production in January 1984 was listed at the stock exchange in 1985.

On the balance sheet date, its principal shareholders Suzuki Motor Corporation, Japan held 35.78 million ordinary shares out of 49.13 million total paid up shares which works out to 72.83% stock of the company.

In the categories of shareholders of Pak Suzuki Motor Company Ltd., 4.9% of its stock was owned by individual investors, 78.5% by 27 foreign investors and 9.2% by 16 investment companies.

The company was formed for the purposes of assembling, progressive manufacturing and marketing of Suzuki cars, pickups, vans and 4x4s. Its main range of vehicles are Mehran car 800 cc, Khyber car 1000 cc, Margalla car 1300 cc, Margalla car power pack, Ravi pick up 800 cc, Bolan van 800 cc, Potohar Jeep 1000 cc.

One of the key objectives of the company is “to abide by the deletion policy of the government, achieve maximum indigenisation and promote the automobile vending industry” — mentioned by the Chairman and Chief Executive Hirofumi Nagao.

It is noteworthy that more than 61% deletion has been achieved in Mehran car. However the lowest deletion being in the Margalla range of cars between 34.14% to 37.70% deletion. Khyber and Bolan vehicles have also achieved substantial deletion percentages which are 46.03% and 50.21% respectively.

The plant of Pak Suzuki has been set up in Pakistan Steel Industrial Estate Bin Qasim Karachi. The company is a 1.346 billion (at cost) fixed asset base company.

The continued depressed economic conditions have adversely impacted the demand of almost goods and services. The volume sales of Pak Suzuki vehicles jacked up by 3%. This was mostly due to aggressive marketing and advertising efforts. But the plant capacity remained grossly under utilised. The installed capacity of the plant on two shifts basis is 50 thousand vehicles against which the company could utilise only 61.03% capacity as it produced 30.513 thousand vehicles compared to 28.04 thousand vehicles in the preceding year.

The chairman commented, “the management is very much concerned about the unutilised production capacity because of lower demand. Higher volumes are necessary for economies of scales. The management is aggressively exploring export markets to utilise idle capacity”.

Paid-up capital of the company in 1994 at Rs 245.66 million was raised to 491.31 million in 1995 through capitalisation of 100% right issue. Since then capital has remained unchanged. However the shareholders equity at Rs 1.37 billion improved to 2.8 times of the paid-up capital.

Both debt/equity ratio at 3:97 and current ratio remained ideally positioned and reflected excellent long term debt coverage and liquidity position.

The balance sheet footing contracted mainly because both current assets and current liabilities were lower than previous year’s.

The company generated sales turnover of Rs 7.710 billion (1996: Rs 7.904 billion, and posted 2.45% decline despite rise in the volume sales. The drop in sales value was because there was shift in the product mix. Last year higher sales of Potohar Jeep and Margalla car was achieved compared to the current year’s sales.

“In the Federal Budget for 1966-67, the government increased the rates of custom duties, sales tax and capital value tax. These fiscal increases adversely affected demand and the company could not sell its project volume” as mentioned in the Chairman’s Review.

All profitability indicators declined as the full impact of rise in custom duties and sales tax could not be built in the sales price to consumers.

Selling and administration expenses work out to 2.28% of sales compared to 1.84% in the preceding year. This was because there was rise in salaries, utilities, repair and maintenance, advertising, sales promotion and there was effect of extended warranty period.

Gross profit at Rs 661.1 million (1996: Rs 917.71 million), operating profit at Rs 485.62 million (Rs 772.5 million) and pre-tax profit at Rs 402.92 million (1996: Rs 743.26 million) recorded decline by 27.9%, 37.1% and 45.8% respectively. The net profit at Rs 391.4 million (1996: Rs 574.5 million) works out to net earning per share of Rs 7.97 which dropped from Rs 11.70 per share of the previous year. The company increased cash dividend to 20% compared to 7% in the previous year. At the ruling share prices at Rs 38 the price/earning ratio is placed at 4.8x.