New auto entrants cautiously optimistic over their investment projects

Kitting and Sequencing for the Assembly Line

Rising project cost, economic slowdown, budgetary measures FY20, falling rupee

The auto market is now facing aftershocks of the Auto Development Policy (ADP) 2016-2021, though it was certainly a pro-industry policy by the PML-N government to promote new players and open new job avenues in the country.
New entrants are either considering pulling back from Pakistan or putting on hold development work due to rising project cost in view of eroding rupee value against the dollar.

The Auto Policy was announced by the PML-N government to lure European, Chinese and Korean investors to break the monopoly of three Japanese assemblers mainly.

Everything was going smooth till April 2019. Suddenly, some shocking news had started making newspapers’ headlines from May that new entrants were perturbed over economic slowdown followed by more concerned over rupee depreciation against the dollar, taking their project cost to new peak.

Currently one dollar is equal to Rs 156 in the inter bank market which was Rs 110 on January 1, 2018 and reached to Rs 123 when PTI government came into power from August 17, 2018. Two months back, one dollar was trading at Rs 160.

The rest of the damage was done by Budgetary measures FY20 like imposition of federal excise duty (FED) of 2.5-7.5 per cent on locally assembled cars of different engine power followed by seven per cent additional customs duty and three per cent additional sales tax on all imports that jacked up input costs, resulting in massive price hike in locally assembled cars amid claim of higher localization.

In addition to above taxes and duties, increase in interest rates had further shaken the confidence of buyers. The local industry believes that the government takes away 40 per cent in terms of taxes and levies on a total retail price of locally assembled car.

The above anti business climate has definitely caused sleepless nights to the new entrants who had put up huge money for local assembly. Some entrants under the umbrella of well organized business groups like Kia (Yunus Brothers) and Hyundai (Nishat Group) had so far not sparked any anger over current business environment relating to the auto sector. However, Younus Brothers’ Lucky Cement CEO Mohammad Ali Tabba had blasted the government’s business policies recently, which are destroying business environment.

The first shock received by the auto market was reports of Al Futtaim pulling back from the Renault project but nothing concrete has so far come from the Gulf and French-based companies.

Market was also abuzz with reports that Renault has revoked Al-Futtaim’s license to build its manufacturing plant in Pakistan following which Al Futtaim decided to hold its investment in the venture.

Board of Investment, Al Ghazi Tractors’ Chief Executive, Shahid Hussain and Faisalabad Industrial Estate Development and Management Company (FIEDMC) had so far been playing safe by not coming out with any negative news in this regard. Lower and high salary staffs at Al Futtaim-Renault had already quit their jobs.

UAE’s Al Futtaim Group had purchased 67 acres of land at M-3 Industrial City in May last year to establish an assembly-cum-manufacturing plant at a cost of $165 million to produce and assemble Renault vehicles and create around 500 jobs.

However, the company has not started any construction work so far which is also evident from the absence of any project details in the website of FIEDMC. Besides, no details are available at worldwide site of Renault-Al Futtaim over Pakistan project.

There were reports that investors were demanding extension till 2,023 in Auto Policy which expires in 2,021. In addition to that, the investors were also seeking an extension of 10-year tax holiday under Special Economic Zone incentives.

Prime Minister Imran Khan was also apprised on the issues faced by Al Futtaim-Renault project. Prime Minister asked concerned departments to remove any bottlenecks at the government’s end to save the huge investment in auto sector.

In 2018, Al-Futtaim announced that the design and pre-engineering work of the project was underway, and on-site activities would commence shortly in Faisalabad. The company aimed project completion in the fourth quarter of 2018 and begin production by 2,020.

Surprisingly, French Senator Pascal Allizard, leading a three member French Parliamentary Group, during April 2019 said that Renault was keen to set up a manufacturing plant in Pakistan.

Soon after above development in May, Adviser to Prime Minister on Commerce and Industry Abdul Razak Dawood quickly assured full cooperation and support to Al Futtaim in resolving various issues in a bid to safeguard $165 million Al Futtaim-Renault investment.

With dark clouds already hovering over Al-Futtaim-Renault project, the auto market received another disturbing news from Ghandhara Nissan Limited (GNL) that has struggling to save “Datsun project in Pakistan.”

“Under economic conditions and uncertain exchange rates one cannot afford to go for a project of this magnitude especially with that level of uncertainty,” GNL said.

Apart from project related challenges, the local economic conditions, particularly the automobile market situation have compelled us to revisit project’s sustainability, GNL added.

Ghandhara, which had planned to invest Rs 6.5 billion in the next four years, has extended its production plan of Datsun by six months to first quarter of 2,021 besides reducing production target by 30 per cent from earlier plan of 50,000 vehicles in five years time, citing uncertain economic conditions, interest rates and vulnerable exchange rate. Market people see “50/50 chance of Datsun project.”

GNL had planned to start assembly of a 1,200cc Datsun Cross in July 2,020 and then rolling out the 1,200cc Datsun Go (five seater) and Datsun Go Plus (seven seater) in the next two to three months.

Sources said GNL had shelved its plan for rolling out Datsun vehicles amid negative reports over Nissan-Renault relations after financial misconduct by its chief Carlos Ghosan. However, GNL wants to avail the opportunity and incentives announced in ADP 2016-2021.

GNL had also planned to achieve 35-40 per cent localization in the next three years after initial start of 18pc.

The company had informed the Pakistan Stock Exchange that due to a substantial devaluation of Pak Rupee against the dollar, localization of parts has become mandatory to make the project viable. However, the technical evaluation study depicted that localization of some parts is either not possible or will take significant time and resources due to lack of technology and expertise in local market. Therefore, Nissan Motor Company (NML) has been exploring options to get these parts developed at a minimum cost by global vendors so that they can be imported as part of CKD.

At the same time, GNL is concerned that it has a limited time frame available to complete all the necessary requirements and start commercial production positively before June 30, 2,021 to avail the brownfield incentives for the new entrants.

Nevertheless, the teams of NML and GNL have been working day and night to address the above issues and hopefully will be able to address these challenges to launch our products within time as both the partners do not want to miss this opportunity of incentives for new entrants. Ultimately, GNL will be the biggest sufferer if it cannot meet the target dates as GNL has been working on this project since long utilizing all the resources including monetary investment as well as manpower.

This is Nissan’s second attempt in Pakistan as it had assembled 599 Nissan Sunny in 1996-1997 but later production came to a halt in 2003-2004.

Amid bad weather, Hyundai Nishat Motors Private Limited (HNMPL) in October came with a good news regarding start local assembly of Porter H100 pickup with 20 per cent indigenisation from January next year.

The company also opened its 3S dealer and digital showroom in the city and introduced Hyundai Ioniq Hybrid car. HNMPL Chief Operating Officer (COO) Tatsuya Sato said the total investment at the Faisalabad manufacturing facility is $150 million with an annual production capacity of up to 15,000 units. The plant will employ 250 people directly.

HNMPL – a joint venture company between Nishat Group, Sojitz Corporation (Japan) and Millat Tractors Limited – is partnering with Hyundai Motor Company (Korea) to become a leading manufacturer, marketer and distributor of automobiles in the country.

The COO said localisation level would be increased to 45 per cent in the next five years which would also open new job avenues.

Uncertain rupee-dollar parity has changed the project feasibility. “One dollar was equal to Rs105 when we initiated the project as compared to current rate of Rs156-158,” he said, adding that the rupee-dollar parity is also hitting existing assemblers despite achieving 65 per cent localisation. “Higher indigenisation in vehicles can stabilize prices on which we are focusing more,” he said.

Apart from IONIQ hybrid car, Grand Starex –MPV powered by a 2.4L petrol engine and SUV Santa Fe are being imported from Korea.

Hyundai is aggressively expanding its 3S dealer network all over Pakistan, and more 10 3S dealers are online to come up in 2019 in eight major cities of Pakistan as the 1st phase, and more nationwide from 2,020.

Kia Lucky Motors (KLM) has introduced locally assembled KIA Sportage and Picanto car and was happy of getting good consumers’ response, though the vehicles are seen in limited numbers on the roads. KLM, a leading Korean auto assembler at Bin Qasim Industrial Park (BQIP), has also taken a stay order from the Sindh High Court against the imposition of turnover tax. The action has opened the door for other investors to take the matter to the courts.

Kia’s plant has been set up an investment of $175 million with annual capacity of 50,000 vehicles. Current employment stands at around 475 people. Vendors are surprised as how Kia is surviving at BQIP which lacks any facilities and incentives.

Regal Automobile Industries has already established an assembly plant in collaboration with Chinese company DFSK Motor Co. Limited and now it plans to roll out and launch 800cc car as completely knocked down kits has been imported. The company has already imported few units in CBU condition for consumers’ response. Regal is also working on automatic transmission with its Korean engineering company.

United Motors in partnership with China’s Louyang Dahe has already launched 800cc car Bravo and now plans for assembly of automatic transmission. According to sources, the company may launch automatic version in the first quarter of 2020.

Khalid Mushtaq Motors under an agreement with China’s Chongqing Kuayue Group had set up an assembly plant in Nooriabad after getting permission from the Ministry of Industries and Production (MoIP) in the end of 2017. Market sources said the company is now looking for buyers to sale the plant at Rs 1.5 to Rs two billon. Chinese officials are still working at the project.

Sources in the auto sector said 70 per cent work at the plant like installation of jigs and fixtures and ED paint shop had already been completed at the five acre plant but the local investor is now searching a prospective buyer for the project. The company has planned to assemble light commercial vehicles and mini passenger vans. The company had imported around 40 commercial vehicles from China for testing the market potential before starting local assembly.

KMMPL had changed production plans twice from December 2017 but later decided to roll out commercial vehicle by the name of “Mushtaq” in October 2019. The plant had the capacity to assemble 100 vehicles per day.

When the MoIP had allowed KMMPL in December 2017 to set up assembly plant in Nooriabad, the company had estimated investment of Rs one billion but so far it had invested Rs 500 million.

No progress has been made so far by Pak China Motors, which had planned brand Lifan in collaboration with Chongqing Lifan.

The project of Foton JW Auto Pak in collaboration with Changsha Foton Vehicle Technology is going on with its Foton brand. However, the company is quite perturbed over falling sales owing to economic slowdown. However, the company is working on bus project but has yet to officially announce it.

Changan Master Motor has already purchased land in Multan and has imported few units of trucks. However, construction has not started yet.

Premier Motors Limited has already brought a land at Hub to produce Volkswagon commercial vehicles. Construction work has been started and local production may start next year.

Khalid and Khalid Holding had started construction and was planning to order equipment for producing heavy commercial vehicles by the name of Shacman. But market reports said that work has been stopped and the company has adopted wait and see attitude. The company has imported few buses.

There has been no progress on Ka Hangten Motor which had planned to assemble Hangten hybrid SUV at Faisalabad.

Reports are coming that Deahan Dewan Motor Compnay, which had planned SUV and light commercial vehicles in collaboration with Korea’s Ssang Yong has stopped activities.

Al Haj Motors has received Greenfield investment for assembly of Proton cars in Karachi. Recently, the Al Haj Automotive, an emerging conglomerate has signed a memorandum of understating (MoU) with Zhong Tong Bus Company of China.
Sources said the MoU has been singed for an initial 50 units of buses in CBU condition and there would be a technology transfer and CKD cooperation agreement between the two companies. Later they would also apply for Greenfield investment for assembly of bus in Karachi.