Competitive Analysis of Auto Sector in Pakistan and China

Transcription

2016
Competitive Analysis of Auto
Sector in Pakistan and China
OUR SPONSORS
INTERNATIONAL FIELD PROJECT:
CHINA
Submitted to:
Dr. Nasir Afghan
& Dr. Rameez Khalid
Group Members:
Aasim Abbas Jafary
Adeel Mansoor
Ammad Ghani
Saneya Vahidi
Waqar Hussain Chang
Acknowledgement
Contents
Acknowledgement ........................................................................................................................................ 4
Preface .......................................................................................................................................................... 5
PAKISTAN ...................................................................................................................................................... 6
1
2
COUNTRY ANALYSIS .............................................................................................................................. 7
1.1
Introduction .................................................................................................................................. 7
1.2
Social Measures and Demographics ............................................................................................. 7
1.3
Significance as a Transit economy ................................................................................................ 7
1.4
Education ...................................................................................................................................... 8
1.5
Infrastructure ................................................................................................................................ 8
ECONOMIC CONTRIBUTION .................................................................................................................. 8
2.1
National Economic Performance .................................................................................................. 8
2.2
Contribution of the Auto Industry to the GDP .............................................................................. 9
3
THE WORLD AUTOMOTIVE MARKET .................................................................................................... 9
4
NATIONAL COMPETITIVENESS ANALYSIS ............................................................................................ 12
5
6
4.1
History of the Automobile Sector in Pakistan ............................................................................. 13
4.2
Major Companies in the Sector .................................................................................................. 13
4.3
Opportunities .............................................................................................................................. 17
4.4
Challenges ................................................................................................................................... 17
4.5
National Competitiveness Conclusion ........................................................................................ 18
PAKISTAN’S AUTOMOTIVE CLUSTER OVERVIEW: ............................................................................... 18
5.1
Passenger Cars: ........................................................................................................................... 19
5.2
Light Commercial Vehicles (LCV)................................................................................................. 20
5.3
Heavy Commercial Vehicles (HCV) .............................................................................................. 20
5.4
Motorcycles: ............................................................................................................................... 21
5.5
Automotive Policy: ...................................................................................................................... 22
5.6
Component Producers: ............................................................................................................... 23
5.7
Government’s model for the sector: .......................................................................................... 24
PAKISTAN AUTOMOTIVE CLUSTER – DIAMOND MODEL ANALYSIS:................................................... 25
6.1
Context for firm strategy and rivalry .......................................................................................... 26
6.2
Demand Conditions..................................................................................................................... 29
6.3
Related and Supporting Industries ............................................................................................. 31
6.4
Factor Input Conditions .............................................................................................................. 32
1
Acknowledgement
6.5
7
Government & Country Chance .................................................................................................. 32
ISSUES & FUTURE CHALLENGES .......................................................................................................... 33
CHAPTER - 2 ................................................................................................................................................ 34
CHINA .......................................................................................................................................................... 34
8
COUNTRY ANALYSIS ............................................................................................................................ 35
8.1
Geography of china ..................................................................................................................... 35
8.2
Social measures........................................................................................................................... 35
8.3
Infrastructure .............................................................................................................................. 36
9
CHINA’S ECONOMY ............................................................................................................................. 36
9.1
China’s GDP Growth Rate ........................................................................................................... 37
9.2
The Chinese Auto Parts Sector .................................................................................................... 38
10
10.1
11
ECONOMIC INDICATORS OF AUTO INDUSTRY IN CHINA: ............................................................... 38
IMPACT, PROGRESS AND WAY FORWARD .................................................................................. 38
NATIONAL COMPETITIVENESS ANALYSIS OF CHINA ....................................................................... 39
11.1
Challenges ................................................................................................................................... 40
11.2
Opportunities .............................................................................................................................. 40
12
CHINA’S AUTOMOTIVE CLUSTER OVERVIEW .................................................................................. 40
12.1
Passenger Cars ............................................................................................................................ 41
12.2
Motor Cycle ................................................................................................................................. 41
12.3
Chinese Vehicles In Pakstan ........................................................................................................ 42
13
CHINA AUTOMOTIVE CLUSTER – DIAMOND MODEL ANALYSIS ..................................................... 43
13.1
Context for firm strategy & rivalry .............................................................................................. 44
13.2
Demand Conditions..................................................................................................................... 47
13.3
Related & Supporting Industries ................................................................................................. 48
13.4
Factor Input Condition ................................................................................................................ 49
13.5
Government and Chance ............................................................................................................ 49
14
CHINA’S AUTO POLICY – 2004......................................................................................................... 49
14.1
Limits on Foreign investment retained ....................................................................................... 49
14.2
Restriction on new investment ................................................................................................... 49
14.3
Import of vehicles and parts ....................................................................................................... 50
14.4
Rational industry development is encouraged ........................................................................... 50
15
ISSUES AND FUTURE CHALLENGES ................................................................................................. 51
Chapter-3 ................................................................................................................................................ 52
PAKISTAN-CHINA COMPARISON ................................................................................................................ 52
2
Acknowledgement
15.1
PAKISTAN CHINA ECONOMIC COMPARISON .............................................................................. 53
15.2
PAKISTAN .................................................................................................................................... 53
15.3
CHINA .......................................................................................................................................... 54
15.4
DEMOGRAPHICS AND PSYCHOGRAPHIC COMPARISON ................ Error! Bookmark not defined.
15.5
PAK-CHINA NATIONAL COMPETITIVENESS COMPARISON ........ Error! Bookmark not defined.
15.6
COMPARISON OF PAKISTAN AND CHINA AUTOMOTIVE CLUSTER ......................................... 67
15.7
CONTEXT FOR FRIM STRATEGY & RIVALRY ................................................................................. 67
15.8
DEMAND CONDITIONS.................................................................................................................... 69
15.9
RELATED & SUPPORTING INDUSTRIES ............................................................................................ 71
15.10 FACTOR INPUT CONDITION............................................................................................................. 73
3
Acknowledgement
Acknowledgement
This report would not have been possible without the help of a few but very key persons that
facilitated us and contributed towards this industrial note. Dr. Nasir Afghan, our MBA Program
Director and the one who pioneered this very unique course that had never been offered in IBA
previously. Dr. Rameez Khalid, who helped us throughout by linking us with the right people in
the auto industry.. Furthermore, Mr. Faisal Jalal’s was also instrumental in us understanding the
auto sector of Pakistan and China as well and he gave us the relevant contacts to take the
interviews from. We are indebted to you Sir.
Mr. Qazi Ebadullah Khan, former CEO Engineering Development Board Pakistan briefed us
about the Pakistani auto scene and he shared his experiences with us about how the industry
works. Without his guidance, we would not have been able to come up with the inside
information of the industry. Similarly, Mr. IHT Farooqui, COO Karakoram Motors also gave us
insights of the Chinese industry and shared his experiences with us regarding the import of
Chinese vehicles in Pakistan.
Lastly, we are thankful to SILC Business School, Angela and our Chinese buddies Tracy, Marlyn,
Sophia, Shelly and John for their wonderful support and reception in China. They truly made our
trip memorable there and helped us thoroughly to gain market insights from the interviews in
China.
4
Preface
Preface
This industrial note provides an analysis and comparison of the automotive industry both of
Pakistan and of China. A group of five students from the Institute of Business Administration
(IBA) enrolled in the course ‘China International Field Project’ visited auto factories both in
Pakistan and in China. This note contains three chapters. First chapter will include information
regarding Pakistan’s Auto Industry, Second Chapter will include analysis information regarding
China’s Auto Industry, and the third chapter will include a detailed comparison of auto
industries of both of these countries.
This industrial note covers sections which include Pakistan and China’s contribution of auto
industry towards their respective GDPs, the national competitive landscape, automotive
policies adopted by both countries, and also details about the automotive cluster. Finally, after
providing a comparison between both industries, challenges, future goals and objectives and
recommendations are also mentioned in this industrial note.
5
PAKISTAN
Chapter 1:
PAKISTAN
6
COUNTRY ANALYSIS
1 COUNTRY ANALYSIS
1.1 Introduction
Pakistan emerged as an independent sovereign state on the 14th of August, 1947. Pakistan is
strategically located at the crossroads of Asia, with China as its neighbor in the North, India in the East
and Iran and Afghanistan in the West. Strategically, Pakistan is situated at a very important place.
Pakistan is situated in a region, which has a great political, economic and military importance. Pakistan is
in the neighborhood of two big powers i.e. China and the Russian Federation. Similarly, Pakistan has an
access to the six Muslim Central Asian States through Afghanistan. These states are land locked states
and Pakistan can provide an inter link between the Gulf States, African, European and Central Asian
countries. Its sea route remains open throughout the year due to moderate temperature. There is a
series of Muslim countries from the Middle East to the African continent, which are easily accessible
from Pakistan. Pakistan, thus, connects almost all the Muslim countries of the world from Atlantic Ocean
to the Arabian Sea.
1.2 Social Measures and Demographics
Pakistan is the sixth most populous country in the world, with an estimated population of over 180
million at a growth rate of 2%. The median age in Pakistan is 22 years, which means Pakistan is a young
country. This vast population is unevenly distributed, with most people living in rural areas. In recent
years, many rural residents have been migrating to cities in search of better paying jobs. If the current
pattern of urbanization continues, the urban population of Pakistan will cross the figure of 122 million
by 2030, which is 50% of total population.
1.3 Significance as a Transit economy
Pakistan has the potential to develop transit economy on account of its strategic location. Land locked
Afghanistan now is at the phase of reconstruction. It is linked to outside world mainly through Pakistan.
China with its fastest economy growth rate of 9% is developing southern provinces because its own port
is 4500 km away from Sinkiang but Gwader is 2500 km away. Moreover, Pakistan offers Central Asian
regions the shortest route of 2600 km as compared to Iran 4500 km or Turkey 5000 km. Gwader port
with its deep waters attracts the trade ships from China, CAR and South East Asian countries, also the
7
ECONOMIC CONTRIBUTION
coastal belt of Balochistan can provide outlet to china’s western provinces to have access to middle
eastern markets with the development of coastal highways and motorways.
Globally, Pakistan stands at 136 in the ranking of 189 economies on the ease of starting a business on
the basis of starting a business, dealing with construction permits, getting electricity, registering
property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing
contracts and resolving insolvency.
1.4 Education
According to Pakistan social and living standard measurements survey 57% of adult population is literate
(15 years and above) excluding FATA, Gilgit Baltistan and AJ&K in which 69% of male population
whereas 45% of female population is literate.
1.5 Infrastructure
In 2008 Pakistan was the world’s third fastest growing telecommunications market. Pakistan's telecom
infrastructure has improved dramatically with foreign and domestic investments into fixed-line and
mobile networks. Pakistan has a reasonably developed transport infrastructure. The growth in demand
for transportation services is considerably higher than the growth in GDP. Road transport is the
backbone of Pakistan's transport system. Port traffic in Pakistan has been growing at 8 percent annually
in recent years. Two major ports, Karachi Port and Port Qasim, handle 95% of all international trade.
Gwadar Port, which was inaugurated in March 2007 and is being operated by Singapore Port Authority,
is aiming to develop into a central energy port in the region. In addition, 14 dry ports cater to high value
external trade. Pakistan Railways has a broad gauge system. The network consists of the main North –
South corridor, connecting the Karachi ports to the primary production and population centres in
Pakistan. There are 36 operational airports in Pakistan. Karachi airport is Pakistan's main airport but
significant levels of both domestic and international cargo are also handled at Islamabad and Lahore.
Pakistan International Airlines (PIA), the major public sector airline, though facing the competition from
a few private airlines, carries approximately 70 percent of domestic passengers and almost all domestic
freight traffic. The transport and communications sector accounts for about 10.0 percent of the
country’s GDP.
2 ECONOMIC CONTRIBUTION
2.1 National Economic Performance
The economy of Pakistan is the 26th largest in the world in terms of purchasing power parity
(PPP), and 44th largest in terms of nominal GDP. However, Pakistan has a population of over
186 million (the world‘s 6th largest) making its GDP per capita as $3,149 ranking the country
140th in the world. Pakistan is a rapidly developing country and is one of the eleven declared
countries that have a high potential to become the world‘s largest economies in the 21st
century. A sound and sustained economic performance in an economy depends on balanced
sectoral growth and right economic policies. The growth rate also depends on internal and
external economic shocks, political stability and internal law and order situation in a country.
Besides that, the demand management policies based on sound public finance play a primary
role in supporting economic growth. Sound public finance minimize the distortion in taxation
nets, ensure price stability and enhance the rate of return on investment by lowering the real
8
THE WORLD AUTOMOTIVE MARKET
interest rate; all these factors ultimately promote economic growth. An economy with unstable
fiscal position can recover by taking corrective measures to strengthen the external sector
conditions by reducing the deficit and volatility of exchange rate.
2.2 Contribution of the Auto Industry to the GDP
Pakistan is an emerging market for automobiles and automotive parts, offers immense business
and investment opportunities. The total contribution of Auto industry to GDP is 2.8%. Total
gross sales of automobiles in Pakistan were Rs.214 billion or $2.67 billion. The industry paid
Rs.63 billion cumulative taxes that the government has levied on automobiles. There are 500
auto-parts manufacturers in the country that supply parts to original equipment manufacturers.
Auto sector presently, contributes 16% to the manufacturing sector. Vehicles’ manufacturers
directly employ over 192,000 people with a total investment of over $ 1.5 billion. Currently,
there are around 82 vehicles’ assemblers in the industry producing passengers cars, light
commercial vehicles, trucks, buses, tractors and 2/3 wheelers. The auto policy is geared up to
make an investment of $ 4.09 billion in the next five years thus, making a target of half a million
cars per annum.
3 THE WORLD AUTOMOTIVE MARKET
The world automotive industry has been enjoying relatively strong growth and profitability but
still there is substantial uncertainty about years to come. The greatest challenge is
disproportion of global markets. Industry experts are hopeful about the U.S. market,
forecasting annual sales in North America in the near term of a relatively robust 16 million cars,
up from only 13 million in 2008 .Still, the position in Europe is considerably weaker. And also
sales have leaped in Russia and South America. For now, the Indian market’s performance has
been shifting and growth in China which is the world’s largest vehicle market has slowed,
despite of growing investment by original equipment manufacturers, continue to ramp up. As
manufacturers are Responding to these demand shifts will be an entire priority for industry
leaders in 20151 (strategy and, 2015). So looking at this uncertainty next ten years are very
important for car manufacturers. Original equipment manufacturers (OEMs), dealers and
suppliers not only must direct these changes in coming time to build their market share and
productivity which is critical for their success in next decade. Following is a table showing the
car sales in last in last decades.
1
http://www.strategyand.pwc.com/perspectives/2015-auto-trends
9
10
International Car Sales Outlook
(m illions of units)
1990-99
2000-11
2012
2013
2014
2015f
39.20
51.55
64.98
68.69
71.15
72.41
North America*
Canada
United States
Mexico
16.36
1.27
14.55
0.54
17.74
1.59
15.18
0.97
17.11
1.68
14.44
0.99
18.33
1.74
15.53
1.06
19.42
1.85
16.44
1.13
20.64
1.88
17.40
1.36
W estern Europe
13.11
14.14
11.76
11.55
12.10
12.95
Germ any
3.57
3.29
3.08
2.95
3.04
3.19
Eastern Europe
1.18
2.85
4.14
4.08
3.79
3.03
Russia
0.78
1.66
2.93
2.78
2.49
1.74
Asia
6.91
13.99
27.25
29.98
31.69
32.29
China**
India
0.43
0.31
5.15
1.06
13.18
2.02
16.30
1.83
18.37
1.88
19.47
1.99
South Am erica
1.64
2.83
4.72
4.75
4.15
3.50
Brazil
0.94
1.75
2.84
2.76
2.50
2.00
TOTAL SALES
*Includes light trucks. **Includes crossover utility vehicles from 2005.
Four Key players in global car sales are China, United States, Europe, and Japan. China is the
largest market and growing with each passing day. After these four major players in terms of
passenger car sales, there are emerging markets which are yet to prove themselves in terms of
sales volumes. Car sales by market reflect the economic difficulties facing various countries:
the recovery is slow in Europe; in the United States it is more distinct; in Japan it is reinforced
by government policies; in emerging markets it is lagging behind, in spite of high prospects. Car
registrations in any country are also a major indicator of a country’s economic condition.2
Source: OICA
2
Sources: OICA, Euler Hermes
So looking at the markets individually following patterns come out which are given below.
1. China. The market is rising as growth in 2014 was 10 % and in 2015 was 8% .So selling has to
be decreased to maintain this growth. China became the world's largest market in 2009,
surpassing the United States
2. United States. The market has regained its lost position as market to grew +4% in 2014 and
+3% in 2015 as 17 million units sold in 2015.
3. Japan. Japan car market is greatly hit by its monetary policy and deliberate tariff barriers as
the Value Added Taxes hike has dent sales by -5% in 2014 and -2% in 2015.
4. Europe. The automotive market is estimated to recover by +5% in 2014 and 2015.
5. France: the market is showing early signs of a recovery in 2015, and sales have increased in
2015, but production, has more than halved since 2005.
6. Italy: The market is still down and production capacity remains to be underutilized with no
hope of a rapid turnaround.
7. Germany: Auto manufacturers are seeking to engross the cost by being more efficient and
developing internal synergies.
8. Pakistan: Pakistan is very small player in world automobile market. Share of Pakistan is less
than 1%.despite being sixth in population but there has been no transfer of technology. Local
industry is not developed yet. Pakistan is still using globally retarded models and not offering
any safety features.
Production is even expected to be more than 100 million vehicles by 2017.The major
component manufacturers, which are crucial for auto makers, have repositioned to follow
production and register strong levels of profitability (Euler Hermes, 2014).
Leading manufacturers in car manufacturing are given in the following Bar chart.
11
NATIONAL COMPETITIVENESS ANALYSIS
Source:3
We can also see that Japan is doing wonders by continuous improvements in its automotive
market, and the Chinese market desires to consolidate and review its pricing to shift up a the
growth pattern. Now there is now competition of innovation, design, and hedonism between
these major players.
4 NATIONAL COMPETITIVENESS ANALYSIS
Despite being the sixth most populous country in the world, there has been no transfer of
technology and local manufacture of vehicle components is minimal. After the oil and
petroleum sector, auto industry sector in Pakistan is the second largest tax payer in the
country. Although, the Automotive industry has been an active and growing field in Pakistan for
a long time, however not as much established to figure in the prominent list of the top
automotive industries.
Pakistan is pretty much middle of the road regarding business development; the fundamentals
processes are in place, however, implementation is still slow. Pakistan has positive factors such
as low cost of labor, and access to entire Central Asia Market. However, Pakistan will have to
address many shortcomings. For starters; Education attainment is a major issue. There isn’t any
public institute which offers majors in Automobile industry.
3
http://www.statista.com/statistics/316786/global-market-share-of-the-leading-automakers/
12
4.1 History of the Automobile Sector in Pakistan
Automobile industry in Pakistan started in 1950, when General Motors, USA started assembly
operations and established National Motors Limited, a public limited company. The company
assembled passenger cars as well as commercial vehicles which carried “General Motors”
brands. The first vehicle was a Bedford truck assembled in Pakistan in 1950.
Bedford Truck
A regular car industry started in the country in 1983, when Suzuki commenced assembly of FX
800 cc to target the middle-income group, which constitutes the larger segment of the market.
In 1992, Suzuki introduced Khyber 1000 cc and Margalla 1300 cc to strengthen its customer
base. Since its inception, Suzuki has enjoyed the position of a market leader in small and
affordable cars.
4.2 Major Companies in the Sector
There are 12 automobile companies listed on the Karachi Stock Exchange under the sector of
Auto & Allied. The car industry in Pakistan primarily comprises of four players, all of which are
Japanese. These are Pak Suzuki Motor Company Ltd., Indus Motor Company Ltd., Honda Atlas
Cars Ltd. and Ghandhara Nissan Ltd. Amongst these, the first player comprises the major
position in the market. DewanMotors is the manufacturer of Kia. The market for Buses and
trucks include Hino-Pak Motor, National Motor, Ghandhara Nissan Diesal etc. The tractors
market comprises of Al-Ghazi Tractors, Master Motors and Millat Tractors.
A brief profile of the major companies is given as under:
13
Company
Name
PAK
SUZUKI
MOTOR COMPANY
LTD.
Logo
Facts
Models
1st passenger car manufacturer
in the industry.
FX
14
Mehran
Formed in August 1983 as a joint
venture
between
Pakistan
Automobile Corporation Limited
(PACO) and Suzuki Motor
Corporation (SMC)-Japan
Alto (Discontinued in 2012)
Baleno, Kizashi
Cultus
The company started commercial
production in 1984
The company was privatized in
September 1992
Liana
Suzuki Swift
Suzuki Wagon R
Largest player in the industry
with over 60% market share
Suzuki Carry
Motorcycles (150, sprinter, raider)
INDUS
MOTOR
COMPANY
LIMITED (IMC)
Joint venture amongst the House
of Habib, Toyota Motor company
& Toyota Tsusho Corporation
Corolla (Many variants)
Hilux
Initiated in December 1989 for
the assembling, progressive
manufacturing and marketing of
Toyota vehicles in Pakistan
The company started commercial
production in May 1993
Vigo Champ
Fortuner
Vitz (Import)
Prius (Import)
IMC is also the sole distributor of
Toyota & in past distributor of
Daihatsu vehicles in Pakistan
Prado
Market share approx 33%
HONDA
ATLAS
CARS LIMITED
Honda
Atlas
operations in
November 1992
started
Pakistan
its
in
Joint venture between Honda
Motor Company, Japan, and Atlas
Group of Companies, Pakistan
Honda Accord
Honda City
Honda Civic
Motorcycles (125, 70, raider)
15
Commercial production started
from July 1994
Company
Name
Logo
Facts
Established as a private limited
company in August 1981 to
import and market Nissan
vehicles in Pakistan
GHANDHARA
NISSAN LIMITED
Technical Assistance Agreement
with Nissan, Japan
Models/Brands
PICK UP
URVAN
CIVILIAN
PATROL
It also has been marketing Nissan
Diesel Trucks assembled in the
country
X-TRAIL
SUNNY (Discontinued)
It was converted into a public
limited company in May 1992 to
undertake production of Nissan
vehicles
JUKE (Import)
MOCO (Import)
Joint Venture Agreement with
Nissan Diesel Company, Japan for
the progressive Assembly of
Passenger Cars, LCV & Heavy
Duty Vehicles
SIND
ENGINEERING
(Pvt.) LTD.
The company has a very low
market share and its products are
not doing so well in the Pakistani
market
SEL registered under
the
Company’s Act in 1963, under the
name M/s Wazir Ali Engineering
ltd.
The company was taken over by
the government in 1972 under
Economic reform order and was
renamed
Sind engineering is holding about
72-75% market share of the
trucks (Mazda), vans and small
trucks segment in the 3.5-6 tons
GVW weight range.
Assembly of Mazda T3500 Truck
chassis
Assembly of Mazda T3500 bus
chassis
Fabrication of bus and truck
bodies on Mazda T3500 chassis
Fabrication of specialized vehicles
i.e. Dump trucks, refuse van, fire
fighter, water boozer, troop
carrier etc
VOLVO Trucks
Company
Name
HINOPAK
Logo
Facts
Result of a joint venture between
Pakistan Automobile Corporation
(PACO), Al-Futtaim of Dubai, Hino
Motors of Japan and Toyota
Tsusho of Japan
Models/Brands
Buses
HINO URBAN BUS
HINO CITI CNG BUS
This company has become a fullfledged member of the Hino and
Toyota family as Al-Futtaim
Group handed over its 59% stake
to Hino Motors and Toyota
Tsusho in 1998
HINO CITILINER EXCLUSIVE
HINO ROADLINER
HINO RAPIDLINER
Strong presence in the market of
buses and trucks
HINO KAZAY
Facing competition from Sind
Engineering when they started
manufacturing Volvo trucks in
1997
Trucks
HINO DUTRO
HINO FG 1J TRUCK
Brand of Hino is going strong in
Pakistan especially in Punjab and
KPK
HINO FM 1J
HINO FL 1J
FAW
Al-Haj FAW Motors (AHFM) was
incorporated as a Private Limited
Company in October 2006
AHFM product line was came into
market in 2006 with the plans to
capture the market by producing
reliable, high quality and
economical vehicles
Local production was started in
August 2011, at Zulfiqarabad
Main National Highway, karachi
Heavy Vehicles
FAW Tiger V
J5M 220 HP 4X2
Light Vehicles
FAW Carrier
FAW V2
FAW XPV
SIRIUS S80
16
YAMAHA
Pakistan
LTD.
Motor
(Pvt.)
Assembling,
manufacturing,
marketing, distributing, selling
and/or
servicing
Yamaha
motorcycles
YBR 125G
YBR 125
parts and accessories of Yamaha
motorcycles
Paid Up Capital
5,300,000,000
Pak
Rupee
Opportunities
4.3

One Belt-One Route: Once the China-Pakistan Economic Corridor is developed and
started its operation, Pakistan can import parts from China on cheaper cost.

Fertile Business Market of Pakistan: Business market of Pakistan is always open for new
investors. Investment in automobile industry can give multiple benefits to investor as
well as to Pakistan in form of Local Employment, Taxes to the Govt. and prosperity to
the nation.

Limited Number of Players: Automotive industry of Pakistan has limited number of
players, till many years Suzuki, Toyota and Honda have captured the Pakistani market.
So if any new company wants to start its operations in Pakistan then it could be a good
opportunity for it.

Pakistan can import automobile parts from China in low cost: Using Pak-China economic
corridor, automobile parts could be imported from China in less transportation cost.

Low Labor Cost: Due to un-employment factor, Pakistan has low labor costs, so new
vehicles can be developed locally in little investment. These vehicles can capture the
local market if these are sold in economic prices to Pakistani people.

Telecommunication: Telecommunication facilities in Pakistan are very cheaper for
example there is no charge on receiving a call while in most of the countries cellular
companies charge on receiving a call too. Additionally the internet facilities in Pakistan
are up to the standard.
4.4 Challenges

Security Conditions: Security condition of the country is not good as it is also the reason
which prolonging the development of economic route and restraining the foreign
investors to invest in Pakistan. Though, Military of Pakistan is working hard to eliminate
the terrorist factor in all parts of the country.
17
PAKISTAN’S AUTOMOTIVE CLUSTER OVERVIEW:

Lack of Research &Development Investment: Investment in R & D sector is very small
and it leads to low profit and margins with saturation of designs.

Lack of Education pertaining to Automotive Industry specifically: There isn’t any
reputable institution which offers massive study in automotive industry. Unfortunately,
at managerial level people learn after entering into the industry and at mechanical level
through street workshops.

Tax on vehicles: Pakistani government is levying high taxes on automobile market due to
this prices of locally manufactured or assembled vehicles are also high.

Un-stability of Government Policies: When we talked to one of the senior managers of
Indus Motors, he told us that government policies towards automotive industry are also
unstable. At times government allows import of 5-7 years old vehicles which badly
affects their sales. Ultimately in order to run their operations they need to increase the
prices of their products or to layoff their employees.
4.5 National Competitiveness Conclusion
The National Competitive environment can be explained in terms of the two segments of the
market. It could be observed that in the upper segment (Upper Class & Upper Middle Class),
Toyota is the market leader whereas Suzuki leads in the lower segment (Lower Middle Class).
Any new good competitor can break this monopoly of the Pakistani Automobiles market and
can get the leverage because Pakistani people appreciate new design hybrid cars with
economic price. Although a huge amount of used cars is exporting from Japan every month but
still the prices of them are not in the reach of Middle-Class buyer.
5 PAKISTAN’S AUTOMOTIVE CLUSTER OVERVIEW:
“Pakistan is a virgin market for the automotive sector”
Qazi Ebadullah Khan
Former CEO, Engineering Development Board
The automotive industry in Pakistan has been supported and encouraged by the government
for the past many decades. The automotive industry contributes nearly Rs50 billion which is
roughly 3% of Pakistan’s GDP, employing a workforce of 192,000 directly and 1.2 million
indirectly. Pakistan produced 152,524 cars and 28,189 pickups in 2014-15 (PAMA), a 25%
growth since 2010.
The vehicles produced in Pakistan encapsulate passenger cars, light commercial vehicles (LCV),
heavy commercial vehicles (HCV) and two wheelers which are supported by a network of
suppliers. Together with various government agencies, Pakistan Automotive Manufacturing
18
Association (PAMA) provides overall direction and support for the automotive industry in
Pakistan. Its objectives are to safeguard interest of the members by playing a central role in all
policy making process and providing the members high quality professional service and also to
play its role to foster harmony and accord amongst all stakeholders.
Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) was formed
in 1988 to represent the industry and to provide technical & management support to its
members. It is a union of auto parts & accessories manufacturers. Its mission is to mission is to
build a competitive edge in the local automotive parts industry by maximizing local content and
by creating an environment which is conducive to innovation & rapid modernization and is in
sync with latest Research and Development.
5.1 Passenger Cars:
This segment is heavily dominated by 3 Japanese companies Toyota, Honda and Suzuki. In
2014-15, Pakistan produced 152,524 vehicle units while the total sales in the same period
remained at 151,134 units (PAMA) which shows that 99.1% of total cars produced were sold.
The sales/production in 2010-11 was 95.5%. Total production capacity of these 3 companies
combined on a double shift basis in 2015 is 254,800 units which mean the combined capacity
utilization of these 3 companies is 60%. In Pakistan, import of used passenger cars is also on the
rise with 22,220 units completely knocked down (CKD) units imported in FY14 (DAWN).
Passenger cars are mostly imported from Japan.
Following are the companies operating in Pakistan in the passenger cars segment:
Pak Suzuki Motors:
Pak Suzuki Motors is the leader for small cars (800cc-1000cc). They are assembling Suzuki
Mehran in the 800cc category, Suzuki Cultus and Wagon-R in the 1000cc category while also
assembling Suzuki Swift and Suzuki Liana in 1300cc category.
Indus Motor Company (IMC):
IMC is the leader of the industry in the sedan car category in Pakistan. IMC assembles
passenger cars for Toyota. In the passenger cars category, they assemble variants of Corolla in
the range of 1300cc-1600cc and import 1800cc variants of Corolla.
Honda Motor Corporation:
Honda assembles 1300cc Honda City and 1600cc Honda Civic. Honda trails behind IMC in this
category.
FAW Motors:
Faw Motors is also assembling 1300cc passenger car V2 which has a V2 engine. They have
recently started marketing their vehicle also.
19
Adam Motor Company:
Adam Motors launched Adam Revo in Pakistan which was the country’s first indigenously
designed car but ceased production in 2006 due to a lack of working capital as the government
did not fulfill its promise to buy cars from Adam Motors.
Nissan Pakistan:
Nissan initially produced Nissan Sunny but discontinued it when it failed to compete on price
basis with Toyota and Honda. It also did not change its model frequently and the customers
shifted to other alternatives. Now it is selling SUV’s in Pakistan.
Dewan Farooque Motors Ltd:
Dewan Farooque Motors used to assemble Hyundai Santro in its Sajawal plant which they were
not being able to utilize fully. Hence they were not achieving economies of scale and could not
compete on price with Suzuki.
5.2 Light Commercial Vehicles (LCV)
Following are the companies operating in Pakistan in this category:
Pak Suzuki Motor Company:
Pak Suzuki Motor Company assembles Suzuki Ravi & Suzuki Bolan in the LCV category. These
cars have competition from FAW motors and also some Chinese companies.
Indus Motor Company:
IMC has Fortuner & Hilux in these categories which are also very popular in Pakistan.
FAW Motors:
Faw Motors assembles LCV’s like small pick-ups FAW Carrier which is similar to Suzuki Ravi and
Faw X-PV which is similar to Suzuki Bolan but they have some value added features like airconditioner.
Dewan Farooque Motors:
DFM also assembled Shehzore trucks but they could not match price competition with Foton
trucks by the Master Group and had to shut the plant down. The quality of this truck was never
in question but its costs were very high due to its imported components.
5.3 Heavy Commercial Vehicles (HCV)
Trucks & Busses:
In 2014-15, 4,039 units of trucks (2,901 in 2010-11) and 575 buses (490 in 2010-11) were
produced in Pakistan. This segment is heavily dominated by Hinopak Motors Ltd with a market
share of 42.5% followed by Ghandhara Nissan Ltd (40.3% market share) and the Master Motor
20
Corporation Ltd with a market share of 17.2%. All these companies are OEM’s (original
equipment manufacturers) which means that they are assemblers and not manufacturers. The
buses are mostly used as passenger buses to transport passengers to and from urban and rural
areas while trucks are used in all kinds of transportation activity happening in the country.
Following companies are operating in Pakistan in this category:
Hino Pak Motors Ltd:
Hino Pak Motors Ltd is assembling Hino trucks and busses. It is jointly owned by Hino Motors
Ltd Japan and Toyota Tsusho Corporation (TTC) Japan. Hino Motors Ltd Japan has the
controlling shares (55%), TTC have 35% shares and 10% are publically owned shares. Pakistan
Automobile Corporation (PACO) and Al-Futtaim Group have divested from the company.
National Motors:
They are assemblers of Isuzu trucks and Ghandhara Nissan Trucks and Sigma Motors. Through
Sigma Motors, they sell Defender Jeeps to the armed forces.
Master Group:
They assemble the Chinese Foton 5-ton trucks and Mitsubishi Trucks.
FAW Motors:
FAW Motors assembles Chinese trucks which are Euro III compliant. They started the import of
trucks from China in CBU (Completely Built Units) but now they import either SKD (Semi
Knocked Down) or CKD (Completely Knocked Down) units.
Tractors:
Following companies are operating in Pakistan in this category:
Millat Tractors Ltd leads the way in the tractor segment 64% market share (2014-15)by its
Massey Ferguson Tractors and is followed by Al-Ghazi Tractors Ltd with a market share of 34%
(Fiat Tractors) and then by Orient IMT Tractor with a market share of just 2%. Pakistan’s
economy is agriculture based and tractor sales vary with the economic conditions. Pakistan
produces the cheapest tractors in the world due to massive localization. As a result, there are
expectations of more foreign tractors being produced in Pakistan in the near future.
5.4 Motorcycles:
PAMA members produced 765,195 units in 2014-15 (838,665 in 2010-11). This decline in
production of motorcycles is attributed to growth in the market share of Chinese motorcycles in
this period which are not PAMA members for which we do not have sufficient data to comment
upon. The biggest PAMA members in terms of capacity and production are Atlas Honda, Ravi
and Suzuki. Atlas Honda has a market share of 85% amongst PAMA members.
21
Atlas Honda is the leader in the two-wheelers segment followed by Yamaha Motor Company
(100cc and above), Suzuki Motorcycles, Habib Motorcycles and then the Chinese companies.
With the influx of competitors, local players like Atlas Honda had no option but to go for
automation and indigenization to retain its leadership in the market.
Better financing options and lower cost will further lead to more economies of scale. More
competition will also have better implications for the sector.
5.5 Automotive Policy:
The new auto policy that the government has been working upon relates primarily to how the
automotive sector of Pakistan can develop and grow and why has it not developed and grown
the way it should have been.
It also looks upon the factors which inhibit the growth in Pakistan and the following factors
have been identified:
 Misuse of the facilities to overseas Pakistanis:
Overseas Pakistanis are allowed to bring one car with them once they return to Pakistan after a
period of 6 months and this facility has been grossly misused by them as the trader lobby buys
them out and they have become importers of used cars. Due to this misuse by the overseas
Pakistanis, the OEM’s operating in Pakistan started to complain about it and the government
bought down the age limit of imported cars to 3 years from the previous 5 years as Pakistan
was being turned into a junkyard of scrap cars.
 Lack of indigenization by the OEM’s:
Suzuki also stopped the production of Alto 1000cc and wanted to replace it with an 800cc Alto.
They wanted to import engines for the car from India and Indian Suzuki Maruti Company
ceased production of its 800cc and shifted to another version. The government did not allow
the import of engines while allowing the import of the plant and paying the Indian counterparts
a royalty and indigenize production but Pak Suzuki Motor Company did not agree to this
proposal and ended up scrapping the Alto altogether.
 Miss-declarations:
There were miss declarations being made also as trucks were brought in as mixers, water
sprinklers & dumpers but then the parts were detached and used as trucks and this practice
very badly affected the HCV market. The government stopped this practice in addition to
reducing the age limit of the trucks from 10 years to 5 years and after a very long time,
Pakistan’s HCV sector is performing very well.
The crux of the auto policy is about the growth and development of the existing investors and
how can new entrants be attracted. The new auto policy provides the auto sector the following
benefits:
22
1. Incentives
The government has provided incentives to the new entrants to achieve indigenization levels
within 5 years at a level which the existing players have already achieved. These incentives will
be monitored on an annual milestone basis. Incentives to the sector also include the reduction
in the age limit of cars from 5 to 3 years and also reduction in smuggling. The government is
hoping that with these incentives, at least 3-4 new companies will enter the market.
2. Value added localization for the existing vendors
The localization of the auto parts industry has benefitted the member of Pakistan Association of
Auto Parts & Accessories Manufacturers (PAAPAM) due to which, they will invest more and
achieve volumes of scale. Competition in the sector will further make investments a necessary
tool for survival.
3. Bringing down the standard tariffs:
The government is incentivizing new entrants in the market by bringing down the standard
tariffs but at the same time looking after the interests of the existing players. Tariffs are a
barrier for new entrants.
All these decisions will bring the costs of the vehicles down while also develop the local auto
sector. Pakistan Industrial Quality Control does not have measurable quality standards and
these need to be looked upon as well. Another issue which needs to be looked upon is the sales
tax increase agreed upon the new tractors.
5.6 Component Producers:
Pakistan’s automotive component manufacturing industry job contribution accounts for nearly
1.39 million which includes direct jobs of nearly 192,000 (Ministry of Industries, 2008). It also
has an export contribution but it is marginal and it has the potential to grow considering the
better economic activity which is directly proportional to the demand of cars.
The issue of the government with the OEM’s is that they are unclear about the indigenization
level measurement. They do not disclose whether they call indigenization on the number of
items or the value of the total components. The component producers also avail concessions on
the raw material on the basis that it is not available in Pakistan.
From the data that we could gather through interviews with the industry experts, following is
the local vs. imported contribution of components in the Big3 companies:
23
Assembler
Indus Motor Company
Honda Cars Ltd
Pak Suzuki Motor Company
Import
40%
40%
35%
Local
60%
60%
65%
Components like rims, air conditioners, tires and battery are being manufactured by local
suppliers like Baluchistan wheels (Rims), Thal Limited (AC), General Tires (Tires), Excide Battery
& Atlas Battery. The doors and some other body parts of the cars are being manufactured by
Indus, Honda and Suzuki. Millat Tractors has a localization of over 90% and the local component
producers produce engine and its parts.
Default of Dewan Farooque Motors shows us why localization is very important for the growth
of this industry. Had they had local components, their costs would have reduced and hence
they could have competed on price.
“In the early 1970’s, excels, gear box and body parts were being manufactured in Pakistan
and the costs were low”.
Qazi Ebad Khan
One reason that higher value added parts are imported is that Japan exports its products
through trading houses and those trading houses earn commission on value. OEM’s operating
in Pakistan route their imports through Toyota Tsusho Corporation (TTC) and hence have to pay
higher prices.
Another reason is that the principals of OEM’s operating in Pakistan have invested in the
regional units by setting up plants in India and Thailand and if they allow Pakistani OEM’s to
produce in Pakistan, their investment will give less returns from those regional units.
5.7 Government’s model for the sector:
Mr. Qazi Ebadullah Khan also mentioned that the government wants the component producers
operating in Pakistan to have technical collaboration with the foreign companies so that
technology transfer could be made possible and the local industries develop as a result.
He gave the following examples:
 Agri Autos has a technical collaboration agreement with Kayaba Japan for shock
absorbers. Agri Autos pay Kayaba 3% royalty on sales and they provide the technology
for the shock absorbers and any development that takes place is in Pakistan.
 Honda has collaboration with a Japanese company Showa and makes shocks in Pakistan.
24
PAKISTAN AUTOMOTIVE CLUSTER – DIAMOND MODEL ANALYSIS:
6 PAKISTAN AUTOMOTIVE CLUSTER – DIAMOND MODEL
ANALYSIS:
Context for firm
strategy & rivalry
Factor Input
Condition
(+) Availability of
cheap labor force
(+) High duties on
imported
components
(-) Lack of highly
skilled automotive
engineers
(-) High cost &
irregular provision
of utilities
Chance
(+) High Growth
potential
(+) Strong
government
support
(-) Strong foreign
CBU competition
(-) Lack of
Innovations
(-) Infrequent new
models
(-) Lack of R&D
Investment
Related &
Supporting
Industries
(+) Govt policies
iming localization
of industry
(+) Concessions on
tariffs
(-) Weak inter and
intra cluster
cooperation
(-) Lack of global
competitive
advantage in any
raw material used
(-) High cost of
utilities
(-) Too many
regulatory & taxation
Demand
Conditions
(+) Robust growth
in domestic
demand
(+) Strong local
demand for
automotive parts
fuelled by major
auto assemblers
(+) CPI spiraling
downwards
(-) Increase in
public sector
transport options
like Metro Bus
and Orange Line
Train
Government
25
The Pakistan automobile clusters competitiveness can be gauged by using the diamond
framework as used in the above figure. Here, we will analytically provide an assessment into
the four broad attributes of the automotive cluster in Pakistan that shapes the local business
environment in which automotive assemblers and auto-parts manufacturers compete. On each
of these factors we would attempt to analyze both the positives and negatives that either
promote or consequently impede the competitive advantage of the cluster.
6.1 Context for firm strategy and rivalry:
The local industry has a high growth potential as has been mentioned in the report before. It
has also been supported by the government since its early days as has been evident in the
favorable government policies towards the Big3 companies. Whenever these companies have
asked something from the government, it has always been fulfilled. An example is the reduction
in age limit of used car import from 5 years to 3 years and increase in duty tariff on imported
cars. But at the same time, the imported cars are giving a very tough competition to the Big3
companies in terms of sales and are capturing a lot of market share.
Imported Used Cars Imported vs
Locally Assembled Cars
For the years 2013 vs 2014 (Jan Nov)
Jan-Nov
2013
Units
Imported Cars
14,559
Locally Assembled Cars
101,281
Total sale of cars
115,840
Share of imported cars
12.6%
Share of locally assembled cars
87.4%
Source: Pakistan Institute of Trade & Development
Jan-Nov
2014
Units
22,496
101,399
123,895
18.2%
81.8%
Increase %
54.5%
0.1%
7.0%
44.5%
-6.4%
26
The greatest selling point of the imported used cars is their quality. Although they are a bit
higher priced, Pakistani customers seem to be willing to pay for them which is evident from the
increase in sales.
Pakistan's imports from the
world
2009
In US $
2010
2011
2012
2013
113,737
188,793
262,970
290,441
206,743
203,498
285,784
361,866
400,407
196,831
63,594
116,592
117,635
151,282
164,779
9,043
13,436
11,961
30,588
36,346
389,872
604,605
754,432
872,718
604,699
29%
52%
16%
2%
31%
47%
19%
2%
35%
48%
16%
2%
33%
46%
17%
4%
34%
33%
27%
6%
< 1000 CC
1001 - 1500 CC
1501 - 3000 CC
> 3000 CC
Contribution
< 1000 CC
1001 - 1500 CC
1501 - 3000 CC
> 3000 CC
Another area of concern shown by the auto experts is the lack of innovation in Pakistani
automobiles as compared to imported ones. Pakistani vehicles are replicas of the globally
launched models and in some cases even retired models. Lack of innovation stems from the
fact that the Big3 companies do not invest heavily in research & development. Thus we have to
face stiff competition from abroad.
Another area of concern is in the strategy making. Big3 Pakistani companies delay their new
models for quite some time which leads to customers shifting away to imported cars. This fact
has been identified in the Corolla Case as well as Punjab government Taxi Scheme below:
27
Toyota Case:
Punjab Government Taxi Scheme:
28
6.2 Demand Conditions
Local demand has constantly gone up in the years post-recession due to improving economic
situation. The chief collaborators of a growth in demand were:
1.
2.
3.
4.
5.
6.
7.
GDP growth
Farm Sales
Decrease in interest rates
Decrease in inflation
Decrease in fuel prices
Introduction of new Toyota Corolla model
Punjab governments taxi scheme
29
Figure above confirms that with an increase in the GPD per capita, the automobile sales have
also increased.
Farm Income is also a major demand booster for automobile sales. Toyota and Suzuki are prime
beneficiaries of farm income boost but unfortunately, data for this is not gathered by SBP or
any other sources. According to the company sources, the farmers buy car or bike after the
crop harvest and hence there is a major uptick seen in rural sales numbers after the harvesting
of both Rabi and Kharif crop.
The pattern of buying cannot be established due to the fact that the farm owners who live in
rural areas buy cars from the nearby cities and it is undocumented how many cars go to the
rural areas as a result.
30
The above figure again shows that there is an inverse relationship between the discount rate
and car sales. This again contributes to the favorable demand conditions for the auto sector.
Reductions in fuel prices have also increased demand for automobiles. The prices are expected
to remain at the current or even lower levels in the next 5-10 years as global politics plays its
part in its reduction. Toyota Corolla’s new model launch & Punjab government taxi scheme
have boosted sales of the overall automobile sector.
Lastly, the introduction of Metro Bus and the planned Orange Line Train in some urban centres
of Punjab will impact the demand for local cars as people prefer to travel via public transport
rather than their own transport.
6.3 Related and Supporting Industries:
As mentioned before, the government is aiming for localization of the industry through AIDP III
and trying to provide the new entrants with milestone based incentives. The local auto industry
is expected to flourish through this measure.
We have also talked about the concessions on standard tariff that the government is already
providing and through AIDP III, these are expected to be further lowered which will benefit the
local industry.
The main auto parts are being manufactured in Pakistan but we see a lack of inter and intra
cluster cooperation which is due to lack of importance given to the parts manufacturers on part
of the government and the manufacturers themselves. PAAPAM was meant to do the same but
since their voices were never really heeded, they have lost their significance.
Pakistan lacks competitive advantage in any of the products being made locally. The bases of
competitive advantage are quality, cost efficiency and speed. Local component manufacturers
are known for their low quality and hence low price products.
The local industry also faces very high cost of utilities such as electricity and gas as well as
inadequate supply of these basic utilities. Also burdening the local industry are the many tax
regimes prevalent in the country. Federal and provincial governments charge different tax rates
which places some producers at an advantage over the other producers in the country.
Lastly, almost every part of every vehicle made in Pakistan has competition from foreign
products. Most of the components imported into the country are made in Thailand and Thai
Baht has depreciated significantly against Pakistani Rupee in the last 2-3 years which has made
these components even cheaper.
31
6.4 Factor Input Conditions:
Pakistan is blessed with a very young labor force of 77% below the age of 35 (Statistics, 201314). Due to prevalent poverty in Pakistan, this young force is bound to work at cheaper rates.
Hence, the automobile sector can capitalize on this cheap labor force and keep its cost down
which also leads to higher economies of scale.
Another factor in this regard is the imposition of high duties on imported components so that
the local industry could develop on its own but the value added parts are only imported from
the regional centres and the principals of OEM’s discourage the technology transfer. Toyota
Japan operates a Toyota City which is located very far from cities and the employees are left
with no option but to think about how to improve in their areas. McDonalds also has a
McDonalds University where the employees take higher level courses in burgeronomics. This
leads to employee advancement in professional and academic life. Pakistani companies should
consider venturing in this area too.
Pakistan suffers from irregular provision of basic utilities like electricity and gas and these
factors have hurt the Pakistani economy. In addition to that, the cost of these basic utilities is
also very high in Pakistan
6.5 Government & Country Chance:
We have already factored in the government of Pakistan’s role in the auto sector in the other
parts of the diamond analysis. We can term CPEC a chance for the automobile industry of
Pakistan as it has the potential to boost Pakistan’s auto sector and take it to newer heights. We
have already mentioned about the demand of trucks, busses and LCV’s that they are expected
32
ISSUES & FUTURE CHALLENGES:
to grow as new network of motorways and highways grows the economic activity in the
country.
7 ISSUES & FUTURE CHALLENGES:







Consistency in Policy: Inconsistent auto policies have been harming the auto sector as
the policies did not last for even 5 years. AIDP I collapsed in the second year as the
government did not grant the concessions it promised in the first year. Statutory
Regulatory Orders (SRO’s) which violate the policy also harm the effectiveness of the
auto policies and the market suffers.
Tariffs must be realistic: Every government protects its investors but over-protection is
always harmful. Incentives must also be provided to the new entrants which creates a
healthy competition which brings out the best of the manufacturing unit as it becomes a
matter of survival.
Concessions should not be on a permanent basis: The government must penalize those
investors who do not fulfill their commitments and must not offer concessions after the
agreed upon terms.
Technological acquisition: Human hand cannot compete with technology and
utilization levels increase as a result of technological advancement.
Policy should also take care of the vendors: Financing of the plants should be
subsidized so that their cost of capital comes down when they have to upgrade their
manufacturing methodologies so that they produce quality parts. For this purpose,
there should also be monitoring authorities who have firm quality standards and they
should be very strict towards achieving quality in production.
Exports: Some of the OEM’s have signed contracts with their principals which disable
them from exporting their products as they have their markets outside Pakistan.
Providing the right environment: Pakistan needs to provide the investors with the right
environment, better law and order as well as subsidizing and providing non-stop basic
utilities.
33
Chapter - 2
Chapter - 2
CHINA
34
COUNTRY ANALYSIS:
8
COUNTRY ANALYSIS:
8.1 Geography of china
It is located in Southeast Asia along the coastline of the Pacific Ocean, China is the world's third
largest country, after Russia and Canada. With an area of 9.6 million square kilometers and a
coastline of 18,000 kilometers, its shape on the map is like a rooster. It reaches Mohe in
Heilongjiang Province as its northern end, Zengmu Ansha (or James Shoal) to the south, Pamirs
to the west, and expands to the eastern border at the conjunction of the Heilongjiang (Amur)
River and the Wusuli (Ussuri) River, spanning about 50 degrees of latitude and 62 degrees of
longitude.
China has most neighbouring countries in the world. it is bordered by 14 countries -- Korea,
Vietnam, Laos, Burma, India, Bhutan, Nepal, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan,
Kazakstan, Mongolia, and Russia. Marine-side neighbors include eight countries -- North Korea,
Korea, Japan, Philippines, Brunei, Indonesia, Malaysia and Vietnam.
Regionally people tend to divide China into four regions, the North, South, Northwest and the
Qinghai-Tibetan areas and because of geographical differences, residents of each region have
distinctive life styles and customs. China has numerous rivers and lakes. According to statistics,
more than 50,000 rivers have drainage areas that exceed 100 square kilometres.
8.2 Social measures

China ranks number 1 in the list of countries by population which is equivalent to
19.24% of total world population

The population of China is estimated at 1,393,783,836 as of July 1 2014

The population density in China is 145 people per Km2

The median age in China is 35.7 years

According to the 2010 census, males account for 51.27% of China's 1.34 billion
people, while females made up 48.73% of the total. At the moment there are about
9 million more boys than girls in China

The People's Republic of China (PRC) officially recognizes 56 distinct ethnic groups,
the
largest
of
which
are Han
others
include
Zhuang, Manchu, Uyghur, Hui, Miao, Yi, Tujia, Mongols, Tibetan, Buyi, and Korean.

The official spoken standard in the People's Republic of China is Putonghua. Its
pronunciation is based on the Beijing dialect of Mandarin, which was traditionally
the formal version the Chinese language [citation needed]
35
CHINA’S ECONOMY

Other languages include other varieties of Chinese: Mandarin dialects, as well as Wu
(Shanghainese), Yue (Cantonese), Minbei (Fuzhou), Minnan (Hokkien or Taiwanese
and Teochiu), Xiang, Gan and Hakka; there are also minority languages spoken in
China.or Taiwanese andTeochiu), Xiang, Gan and Hakka; there are also minority
languages spoken in China

The overall literacy rate of china is 96.4% and the Chinese government puts great
importance on the education
8.3 Infrastructure
Infrastructure has opened the door to socio-economic development in China. Economic
growth—facilitated in part by roads, water, and power investments— has helped pull
roughly 700 million people above the poverty line in the last 20 years. China’s extraordinary
economic achievements have been made possible by a range of factors including exportfriendly trade and investment policy, sound macro-economic management and political
stability. The timely delivery of urban infrastructure has also been an essential driver of
economic growth, underpinning the rapid development of industry and breakneck growth
of cities in eastern China.
The government sets aggressive sustainability targets in the energy sector: reducing the
energy intensity of economic output by 16 percent over five years and increasing non-fossil
fuel use to roughly 11 percent of primary energy consumption.
Perhaps the most complex sustainability challenge for infrastructure development in China
is in the transportation sector. The PRC government is moving to expand public transport,
tighten fuel efficiency standards, and improve fuel quality. However, ever-expanding road
networks and rising living standards are pulling people to live farther from work, ride
bicycles less, and drive their cars more. China’s road network has more than tripled in
length in the last two decades
9 CHINA’S ECONOMY
China's economy is now the biggest in the world, topping the United States. China's gross
domestic product is worth $17.6 trillion, adjusted for China's relatively low cost of living,
compared with $17.4 trillion for the U.S., the International Monetary Fund estimated as
part of its latest World Economic Outlook.
36
CHINA’S ECONOMY
9.1 China’s GDP Growth Rate
The Chinese GDP expanded a quarter-on-quarter seasonally adjusted 1.8 percent in the
third quarter of 2015, the same pace as a downwardly revised expansion reported in the
June quarter and slightly above market consensus. GDP Growth Rate in China averaged 1.90
percent from 2010 until 2015, reaching an all-time high of 2.50 percent in the second
quarter of 2011 and a record low of 1.40 percent in the first quarter of 2012. GDP Growth
Rate in China is reported by the National Bureau of Statistics of China.
37
ECONOMIC INDICATORS OF AUTO INDUSTRY IN CHINA:
9.2 THE CHINESE AUTO PARTS SECTOR
There are multiple reasons for foreign parts makers to build facilities in China. First of all, unlike
the 50% cap on foreign ownership in vehicle manufacturing companies, there are no limits on
foreign stakes in the automotive parts sector. This means international companies can set up
wholly foreign-owned auto parts companies in China, without fear of transferring advanced
technology to local partners. Second, the Chinese government increased the tariffs on auto
parts from 10% to 25% if imported parts made up more than 60% of the finished vehicle’s
value. Other important factors are competitive labor costs and an increasingly skilled labor
force. However, as China’s economy continues to grow and the living standards continue to
rise, wages and benefits will increase as well. There also has been pressure for China to allow its
currency to appreciate further. China’s advantage as a low cost manufacturing base will likely
diminish over time.
10 ECONOMIC INDICATORS OF AUTO INDUSTRY IN CHINA:
10.1 IMPACT, PROGRESS AND WAY FORWARD
The automobile industry, a key sector in China’s industrialization and modernization efforts, has
been developing rapidly since the 1990s. In recent years, China has become the world’s fastest
growing automotive producer. Annual vehicle output has increased from less than 2 million
vehicles in the late 1990s to 9.5 million in 2008. In terms of production volume in 2008, China
has surpassed Korea, France, Germany, and the United States, trailing only Japan. A
disproportionate share of China’s output was heavy vehicles in the 1990s. However, since 2000
China’s growth has been led by an increase in passenger cars, which now account for more than
65% of its vehicle production. China’s automobile industry has continued to expand despite the
global economic downturn. From January to October 2009, more than 10 million vehicles were
sold in China. If such growth continues, China is on its way to becoming world’s largest auto
market.
China’s automotive industry has developed extensively through foreign direct investment. This
investment has come in the form of alliances and joint ventures between international
automobile manufacturers and Chinese partners. The international automobile manufacturers
are unlikely to promote Chinese exports that compete with their own products in other
markets. As a consequence, the Chinese companies that have expressed a strong interest in
exporting cars have not had strong ties to foreign car producers and that, consequently, may
struggle to meet safety and emission standards in industrialized countries. However, if
independent producers can achieve much higher standards, they could prove to be a strong
international competitor.
Within the Chinese industrialization process, no development may be more important than the
growth of China’s automotive industry, which is a catalyst for many other linked sectors of the
economy. In particular, China’s focus on the auto industry and the supporting infrastructure
38
NATIONAL COMPETITIVENESS ANALYSIS OF CHINA
and development patterns that accompany it may have the potential to upset many existing
manufacturing and trade relationships in significant ways.
In 2008, China produced nearly eight times as many motor vehicles as it did in the mid-1990s.
With annual production of 9.5 million vehicles in 2008, it surpassed the United States for the
first time, as the second largest national vehicle producer, trailing only Japan in total vehicle
output. From January to October 2009, about 10.89 million vehicles, reportedly, were sold in
China. If China can sustain this level of growth, it will overtake the United States to become the
largest auto market in the world.
The automobile industry is already a major force propelling the Chinese economy and its
workforce; the main question is whether China will mainly consume automobiles in its own
market, take a more aggressive export-oriented approach similar to that of Japan and Korea, or
create some mixture of these two. Indicators suggest that China, already far more open to
foreign investment than either Japan or Korea, may take a hybrid approach that focuses on
domestic consumption while also building vehicles for export in order to induce Chinese
companies to produce world class cars. Additionally, China’s automotive parts manufacturing
sector is export focused, increasingly complex, and rapidly moving from low-cost to more valueadded production.
11 NATIONAL COMPETITIVENESS ANALYSIS OF CHINA
Being the most populous country in the world, China’s demand for cars is also increasing day
by day. People of big cities like Shanghai have enough amounts that they can afford a car easily.
Ultimately the cars on China’s roads are increasing with each coming day and due to pollution
and traffic jam factor, Government has imposed an EVEN/ODD number plates rule.
From2009 Annual production of automobiles in China has increased from the combined of
Japan and United States. After becoming the member of World Trade Organization, China has
exported 814,300 units in 2011.
The namely local brands are:











Beijing Automotive Group
Brilliance Automotive
BYD
Dongfeng Motor
FAW Group
SAIC Motor
Chang'an (Chana)
Geely
Chery
Jianghuai (JAC)
Great Wall
39
CHINA’S AUTOMOTIVE CLUSTER OVERVIEW

and Guangzhou Automobile Group
The automobile industry of China was started in 1950 by the help of USSR, till 30 years she did
not produce more than 100-200 cars per year. China's annual automobile production capacity
first exceeded one million in 1992. By 2000, China was producing over two million vehicles. By
2007, China produced over eight million automobiles. In 2009, China produced 13.79 million
automobiles, of which 8 million were passenger cars and 3.41 million were commercial vehicles
and surpassed the United States as the world's largest automobile producer by volume. In
2010, both sales and production topped 18 million units, with 13.76 million passenger cars
delivered, in each case the largest by any nation in history. In 2014, total vehicles production in
China reached 23.720 million, accounting for 26% of global automotive production.
Due to the increasing demand of automobiles in China, many international car industries have
opened their local manufacturing branches in China in order to produce China: A good, stylish
and a cheaper vehicle. The “SHANGHAI VOLKSWAGEN” is one of them. It is one of the earliest
automobile joint venture in China. This company came up by the cooperation between the
Sino-German shareholders; the joint venture was started on 1984 between the German
company “VOLKSWAGEN” and Chinese company “SKODA”. They are producing their vehicles
under one roof with different name and brands. This company was also awarded by the “China
Quality Award” in 2014.
11.1 Challenges
The major challenge faced by Skoda and Shanghai Volkswagen group is the increasing trend of
using imported cars by local Chinese consumer. The imported brands like Audi, Lexus, Mazda,
Toyota and Porsche are the major competitors of Shanghai Volkswagen group. These brands
can be easily seen on Shanghai’s road, every third vehicle of Shanghai is an imported car.
11.2 Opportunities:
It is the right time for local Chinese car manufacturing industries including Shanghai Volkswagen
to enhance their R&D on making new and luxury passenger car shapes with innovation because
Shanghai’s people have potential to buy luxury and expensive cars. But they want to spend
their money on something stylish, innovative and new.
12 CHINA’S AUTOMOTIVE CLUSTER OVERVIEW
In China, the automobile industry is huge. It is the biggest of the world in terms of automobile
production since 2008. It even exceeds the production of automobile in Japan and the US
combined. The one company that we were able to visit in China - Shanghai Volkswagen (SVW)
only produced 1.74 million units in 2014 – a growth of 11.8%! If we take it as a representative
sample, we can only say that the demand in future is going to grow but in the longer term, the
demand will grow but at a decreasing rate.
The vehicles produced in China consist of all types of vehicles in the LCV and HCV categories
and they are also supported by a network of suppliers and the China Association of Automobile
Manufacturers (CAAM) which safeguards the interest of the automobile industry. Its main
40
functions include policy research, information service, self-discipline in the trade, international
communication and exhibition service.
China also aims to turn Shanghai into a major center for global automobile industry and we
have seen that the biggest global brands like SVW and Mercedes Benz also have their facilities
located in the city. But at the same time there are too many concerns regarding the air
pollution in Shanghai and Beijing which has led to a policy of “odd-even car ban”. This policy
means that vehicles with even and odd number license plates will be allowed to drive on
alternate driving days to ease the traffic flow and hence the pollution in these first tier cities
and encourage people to use public transport systems like buses and subway system.
The average Chinese customer is a person who saves a lot in absence of a strong social security
system and it presents an opportunity for the automobile industry to get their savings out for
purchase of an automobile which he can perceive as an investment for the future. The Chinese
customer is also someone who wants to increase his social status even at the cost of purchasing
things he does not need and which are considered as a luxury and this area also presents an
opportunity for the automobile industry to tap.
12.1 Passenger Cars:
We have already talked about the passenger car production increase in 2015 and it is also
evident in the figure 1 below. We can also see that from the beginning of the 3 rd quarter of the
year production reduced and in the months of Jul – Sept we see a negative Y.o.Y growth before
picking up in the months of Oct – Dec 2015 which was due to a purchase-tax-halving policy
which drove the sales of passenger cars and a surge in demand of SUV’s.
Figure 1: Source - CAAM website
12.2 Motor Cycle:
As we can infer from the figure 2, the motorcycle production has declined in the year 2015
which can be due to multiple factors like the influx of E-Bikes and reduction of exports in the
year due to appreciation of Chinese RMB against the major currencies.
41
Figure 2: Motorcycle production - comparison of 2014 and 2015
12.3 Chinese Vehicles In Pakstan:
In Pakistan, Chinese vehicles were introduced in the form of motorcycles for the first time.
Firstly, Sohrab was introduced, and then Qinghci was introduced by Saigal Group followed by
the introduction of Zabardast Motorcycles. Due to low costs, there was an influx of the Chinese
motorcycles in Pakistan and as a result, price of motorcycles in Pakistan has reduced. Before
this, the Pakistani market had a lot of Japanese and Korean motorcycles. The Korean
motorcycles had reached the price and quality of Japanese motorcycles. Korean engineers are
also just as technically sound and clear in coordination.
Chinese vehicles assembled in Pakistan are imitation of foreign brands for example Cheery QQ
is an imitation of Chevrolet Joy by General Motors, Changhan and Kalash are inspired by Suzuki
Ravi. It is important to also note that Suzuki and Changhan had a technical collaboration
agreement as well but still their cars were imitated. Similarly, in the trucks category, Isuzu
trucks are also being imitated in the Chinese market. They also could not give the drawing of
spare parts to their partners due to copyright issues but recently, the Chinese manufacturers
have started to incorporate new designs in their cars as many design houses have emerged and
imitation has decreased.
42
CHINA AUTOMOTIVE CLUSTER – DIAMOND MODEL ANALYSIS
43
13 CHINA AUTOMOTIVE CLUSTER – DIAMOND MODEL ANALYSIS
Context for firm
strategy &
rivalry
Factor Input
Condition
(+) Availability of
cheap labor force
(+) Highly skilled
automotive engineers
(+) Abundant
availability of the
factors of production
(-) Increasing labor
costs
(+) Very high GDP
growth
(+) Strong government
support
(+) Increasing GDP from
transport
(+) Perception
(+) Increasing car
registration
(+) Investments
(-) Decreasing business
confidence
(-) Lack of new energy
automobile models
(-) Imitation of foreign
cars
(-) Short-term
strategies
(-) Lack of R&D
Related &
Supporting
Industries
Chance
(+) Strong inter and
intra cluster
cooperation
(+) Mass production
(-) Lack of competitive
advantage
(-) High cost of utilities
(-) Lack of innovation
(-) Lack of investment
Demand
Conditions
(+) Huge Export
Potential due to CPEC
(+) Luxurious lifestyle
(+) Mindset for
savings of Chinese
people
(+) Reduction in
gasoline prices
(-) Even – Odd car ban
(-) Government
emphasis on people
using public transport
(-) Increasing inflation
(-) Saturation of
trucks and
developmental
vehicles in China
(-) Lack of brand
power
(-) Appreciation of RMB
(-) Lack brand power
Government
The Chinese automobile clusters competitiveness can be gauged by using the diamond
framework as used in the above figure. Here, we will analytically provide an assessment into
the four broad attributes of the automotive cluster in China that shapes the local business
environment in which automotive assemblers and auto-parts manufacturers compete. On each
of these factors we would attempt to analyze both the positives and negatives that either
promote or consequently impede the competitive advantage of the cluster.
13.1 Context for firm strategy & rivalry
After China opened up its economy and especially after 1992, the process of industrialization in
China has reaped very high rewards for its economy. From the figure 3 below, we can see that
the car production has increased from under 500,000 units in 2006 to a massive 2 million plus
units in 2014-15. This can be attributed to the multiple factors briefed below:
Figure 3: Car production in China from 2006-15
China’s GDP had been growing in double digit until 2010 after which it has started to slow down
due to a slowdown in industrial output, sluggish property investment and a contraction in
exports (figure 4). But the government has been taking measures to maintain the GDP and
according to some experts, for the government, the ends are important and not the means to
achieve the ends. The Chinese government has been proactive to make sure that the fall in GDP
growth rate is arrested and for that matter, on every board of governors of every enterprise, a
member is appointed by the government who benchmarks that enterprise on the basis of its
financial performance only. The contribution of the automobile sector towards the GDP has
always been very high in China and thus they enjoy a lot of support by the government.
44
Figure 4: GDP growth rate of China 2006-15
On an average, the GDP from transport has also increased over the years which have prompted
a lot of investment in this sector and it is evident from the figure 5 below:
Figure 5: China's GDP from transport 2006-15
Another factor which is important for this industry in China is that the Chinese people perceive
owning a good vehicle increases their social status and for them a higher social status is very
important. They invest in luxurious items even if they do not really need them. Therefore the
companies operating in China build their strategy taking this factor into account as well.
Historically, passenger car sales have been increasing since the last 10 years and it has already
crossed the 2 million unit mark making China the largest automobile market of the world (figure
5). Another thing which increases confidence in this industry in China is the fact that a lot of
investment has been made in the country’s automobile sector as the government provided
incentives to set up plants in the economic zones.
45
Figure 6: The increase in China's passenger car sales from 2006-15
There are also some negatives which are hindering the growth of this sector as well:
Figure 7: China's Business Confidence Index 2006-15
Figure 7 shows the business confidence index. After the recession of 2007-08, it hit the lowest
in this decade. A reading above 50 indicates an expansion of the manufacturing sector
compared to the previous; below 50 represents a contraction; while 50 indicates no change.
China currently is averaging below 50 and it needs to increase this index if it wants to attract
new business.
SVW has mentioned in its annual report 2014 that it needs to make new energy automobile
models to come at par with the bigger brands of the world and not leave this market segment
open for competitors. In addition, the models being produced in China are an imitation of the
foreign cars and no new innovative features are being added by the Chinese manufacturers and
they need to add value to become competitive. This is because they do not invest in R&D as
much as they should do.
46
The Chinese are also known to make their strategies for the short-term rather than the longterm. An example of this is that they reduce their price of the components once it is localised in
Pakistan. These practices harm the Pakistani industry as buyers start to import again.
13.2 Demand Conditions:
As the Chinese automotive scene moves towards saturation with nearly every big player of the
world operating in China, it provides an option to the manufacturers to export to developing
and neighbouring countries and become a regional power as well. According to the experts of
the Chinese industry, Chinese auto exports are expected to grow to further heights due to CPEC
as demand for prime-mover trucks increase. Local demand for new prime-mover trucks has
diminished due to lack of development in China.
Figure 8: FAW's Chinese prime-mover truck
As we have already seen that the demand has grown with an increase in GDP and the Chinese
people have started to adopt a luxurious lifestyle, it has led to a manifold increase in the
number of cars that we see on the roads in the first tier cities of China. We have also talked
about the mind-set of Chinese people that they like to save for their future spending in absence
of a good social security system. Another factor which leads to an increase in demand for
automobiles is that the global prices of gasoline have decreased to record low levels and China
also produces oil which is the raw material of the gasoline items.
The factors which negatively affect the demand of automobiles include Even-Odd car ban which
we have already mentioned above. Also included is the emphasis the government puts on the
use of public transport system of buses and subways. The public transport system in the first
tier cities of China are very masterfully built and hence can easily drive demand down for the
automobiles.
Another factor which can reduce the demand for automobiles is the rising inflation and the
saving power of the customer can decrease as a result. Appreciation of RMB against the Dollar
(figure 8) also hinders export which is also a determinant of demand and lastly, the Chinese
vehicles tend to have a lower brand power as compared to the competition from other parts of
the world and the Chinese customer also feel that this is the case and hence they import
vehicles for their usage as it will also help increase their social status.
47
To increase the demand for exports in neighbouring and developing countries, Chinese
manufacturers need to enhance the image of their products as most of the low quality products
of Chinese origin are sold in these countries. The buyers in these countries prefer Japanese or
Korean vehicles due to their high quality, availability of spare parts and better after sales
service. These are some of the main reason that Chinese cars are not popular in these
countries.
Figure 9: Chinese yuan recent volatility
13.3 Related & Supporting Industries:
The whole automobile industry in China is closely knit together and they are very strongly
connected with each other. There is a lot of cooperation and the supporting industries
complement the automobile products. CAAM protects the interest of both the industries.
Due to the mass production, the Chinese are able to amortise their investment over the course
of the life of that particular model which leads to economies of scale and investment multiplier.
Again, there seems to be a lack of competitive advantage in this industry as well as most of the
models of the vehicles that are being produced are imitation of foreign vehicles and there is no
room for the supporting industries to play and innovate. In addition to that, they also have to
pay a very high cost of utilities which affects their margins and many firms go out of business
annually due to this reason.
Lastly, there seems to be a general lack of investment for the future on part of the supporting
industry. They invest in new technology not until a new model is being introduced.
48
CHINA’S AUTO POLICY – 2004
13.4 Factor Input Condition:
China’s main competitive advantage has been its very cheap labour cost but now that they have
an ageing population, this competitive advantage is moving towards becoming a competitive
disadvantage as more and more fresh graduates are earning a very high starting salary in
absence of young labour. The average starting salary for a fresh undergraduate degree student
is about 4,500 RMB and most of these manufacturing units cannot hire this fresh talent. China
also has a number of very skilled automotive engineers who are able to imitate the foreign
brands and provide technical support whenever it is needed.
It also has an abundance of factors of production such as land, labour & capital which makes it
an ideal manufacturing country but due to the expensive labour element, they are facing
problems in maintaining China as the hub of all the automotive industry and investors are
moving to India and Bangladesh as both these countries have very cheap labour.
13.5 Government and Chance:
As mentioned before, the Chinese government has protected its industry from foreign
domination and it auto policy (below) also highlights how China over-protects its auto industry.
The Chance in our opinion for China is the opening up of its economy in 1992 when foreign
automakers stepped in and started to invest heavily. The future chance for China also lies in
CPEC as the Western China will be developed and its exports to the world will increase as the
network of roads emerge and it is able to ship its products through Pakistan, saving a lot of
time.
14 CHINA’S AUTO POLICY – 2004
14.1 Limits on Foreign investment retained:
 According to an estimate, 90% of all passenger cars sold in China are Sino-Foreign
joint ventures. Under the new policy;
 Foreign investment in vehicle assembly projects continue to be capped at a
maximum of 50%.
 However, for vehicle assembly projects geared to export and located in export
processing zone, foreign investment of more than 50% is allowed, subject to
State Council’s endorsement.
 The number of joint ventures allowed to be established by the foreign
automakers remains two per vehicle category (sedan, commercial and
motorcycle)
 Foreign component manufacturers are not subject to 50% ownership limit
14.2 Restriction on new investment:
 To curb over-investment in the sector, a minimum investment size of RMB 2
billion is stipulated in the policy
49
CHINA’S AUTO POLICY – 2004
 Existing dormant vehicle production companies cannot transfer their
manufacturing licenses to non-automotive enterprises
14.3 Import of vehicles and parts:
 From 2005, imported vehicles can no longer be stored in bonded warehouses in
China.
 Imported parts will be subjected to the same level of import tariffs as complete
vehicles
14.4 Rational industry development is encouraged:
 R&D expenses will be tax deductible in order to encourage local R&D activities
 Various auto related sectors such as financing and insurance will be developed
 Application of standard nationwide administrative and registration fees
50
ISSUES AND FUTURE CHALLENGES:
15 ISSUES AND FUTURE CHALLENGES:
15.1 Technology Transfer: The biggest issue with the Chinese industry is the lack of
technology transfer to their partners elsewhere in the world especially in countries such
as Pakistan. As mentioned before, because of imitation of foreign cars and copyright
issues elsewhere in the world, they cannot transfer the technology.
15.2 High Prices: The prices of Chinese cars have increased and they claim that their quality
is equivalent to Korean and Japanese vehicles hence the increase in price. Another
reason for price hike is the increase in price of raw material.
15.3 Lack of Technical Support: Lack of technical support is a huge problem with the
Chinese companies and their foreign partners due to language barriers and the engineers
are also not able to communicate with their foreign partners. The Japanese are known to
do a root-cause analysis for every minor problem but the Chinese do not take interest in
the root cause of the problem.
15.4 Spare parts: The prices of the spare parts of Chinese vehicles are somewhat equivalent
to the Japanese vehicle spare parts and thus the Chinese vehicles lose their lower initial
price competitiveness.
15.5 Poor after-sales service: The Chinese companies are also unable to provide proper
after sales service to their OEM’s which leads to mistrust and other business liabilities as
sales of the vehicles drop until the resolve their problems.
51
52
Chapter-3
PAKISTAN-CHINA
COMPARISON
PAKISTAN CHINA ECONOMIC COMPARISON
16 PAKISTAN CHINA ECONOMIC COMPARISON
16.1 PAKISTAN
In Pakistan, Toyota Corolla has been the most successful sedan since the 1980’s while in the
small cars category, Suzuki Mehran has been the most popular car but since its launch in 1989,
it hasn’t evolved much. In addition to Toyota and Suzuki, Honda is the other big player in the
market.
Figure 10: Evolution of Suzuki Mehran?
These big three companies have a strong hold over the Pakistan automotive scene and they
have also been protected by the government until recently but new entrants like FAW have
53
popped up. It is expected that after the new auto policy is announced, some global auto giants
like VolksWagen, Fiat, Nissan and Reno are vouching to enter the Pakistan market. In the
luxurious vehicles category, Mercedes-Benz and Porsche have their presence in Pakistan and
they are catering to the elite class of the country only.
According to the experts of the industry, the government of Pakistan has overprotected the big
three companies and this has led to a stagnation of the automobile scene of Pakistan. Such is
the performance of the local OEM’s that some traders have misused the policies of the
government to import cars from Japan and United Kingdom which are very popular among the
masses and their numbers are rapidly growing.
Some companies like Dewan Farooque Motors, Nissan and Adam Motors have closed down
their plants in Pakistan because they could not compete on price with the big three OEM’s. The
cost of their vehicles was very high as they lacked indigenous components. The local
component manufacturers or the supply base also import most of their raw material from
abroad which also impacts the final selling price. This is one of the main reasons of high priced
vehicles in Pakistan.
We believe that Pakistan needs to localize its industry, add new value added features in the
cars, transfer technology to the country, provide incentives and support to the auto sector,
enhance the financing options and reduce sales tax if it wants the sector to grow to great
heights.
16.2 CHINA
Since the late 1970s China has moved from a closed, centrally planned system to a more
market-oriented one that plays a major global role - in 2010 China became the world's largest
exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to
include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state
enterprises, growth of the private sector, development of stock markets and a modern banking
system, and opening to foreign trade and investment. China has implemented reforms in a
gradualist fashion. In recent years, China has renewed its support for state-owned enterprises
in sectors considered important to "economic security," explicitly looking to foster globally
competitive industries.
After keeping its currency tightly linked to the US dollar for years, in July 2005 China moved to
an exchange rate system that references a basket of currencies. From mid-2005 to late 2008
cumulative appreciation of the renminbi against the US dollar was more than 20%, but the
exchange rate remained virtually pegged to the dollar from the onset of the global financial
crisis until June 2010, when Beijing allowed resumption of a gradual appreciation and expanded
the daily trading band within which the RMB is permitted to fluctuate. The restructuring of the
economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP
since 1978.
54
Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in
2013 stood as the second-largest economy in the world after the US, having surpassed Japan in
2001. The dollar values of China's agricultural and industrial output each exceed those of the
US; China is second to the US in the value of services it produces. Still, per capita income is
below the world average. The Chinese government faces numerous economic challenges,
including: (a) reducing its high domestic savings rate and correspondingly low domestic
consumption; (b) facilitating higher-wage job opportunities for the aspiring middle class,
including rural migrants and increasing numbers of college graduates; (c) reducing corruption
and other economic crimes; and (d) containing environmental damage and social strife related
to the economy's rapid transformation.
Economic development has progressed further in coastal provinces than in the interior, and by
2011 more than 250 million migrant workers and their dependents had relocated to urban
areas to find work. One consequence of population control policy is that China is now one of
the most rapidly aging countries in the world. Deterioration in the environment - notably air
pollution, soil erosion, and the steady fall of the water table, especially in the North - is another
long-term problem. China continues to lose arable land because of erosion and economic
development. The Chinese government is seeking to add energy production capacity from
sources other than coal and oil, focusing on nuclear and alternative energy development.
Several factors are converging to slow China's growth, including debt overhang from its creditfueled stimulus program, industrial overcapacity, inefficient allocation of capital by state-owned
banks, and the slow recovery of China's trading partners. The government's 12th Five-Year Plan,
adopted in March 2011 and reiterated at the Communist Party's "Third Plenum" meeting in
November 2013, emphasizes continued economic reforms and the need to increase domestic
consumption in order to make the economy less dependent in the future on fixed investments,
exports, and heavy industry. However, China has made only marginal progress toward these
rebalancing goals. The new government of President XI Jinping has signaled a greater
willingness to undertake reforms that focus on China's long-term economic health, including
giving the market a more decisive role in allocating resources.
55
PAKISTAN
GDP - real growth 3.6% (2013 est.)
rate
4.4% (2012 est.)
3.7% (2011 est.)
GDP (purchasing
$574.1 billion (2013 est.)
power parity)
$554.2 billion (2012 est.)
$531 billion (2011 est.)
note: data are in 2013 US
dollars
GDP - per capita
$3,100 (2013 est.)
(PPP)
$3,100 (2012 est.)
$3,000 (2011 est.)
note: data are in 2013 US
dollars
GDP - composition Agriculture: 25.3%
by sector
industry: 21.6%
services: 53.1% (2013 est.)
Population below
poverty line
Household
income or
consumption by
percentage share
Inflation rate
(consumer prices)
Labour force
Labour force - by
occupation
Unemployment
rate
CHINA
7.7% (2013 est.)
7.7% (2012 est.)
9.3% (2011 est.)
$13.39 trillion (2013 est.)
note: data are in 2013 US dollars
$9,800 (2013 est.)
$9,100 (2012 est.)
$8,300 (2011 est.)
note: data are in 2013 US dollars
Agriculture: 10%
industry: 43.9%
services: 46.1%
(2013 est.)
22.3% (FY05/06 est.)
6.1%
note: in 2011, China set a new poverty
line at RMB 2300 (approximately US
$3,630)
(2013)
lowest 10%: 3.9%
lowest 10%: 1.7%
highest 10%: 39.3% (FY05/06)
highest 10%: 30%
note: data are for urban households only
(2009)
7.7% (2013 est.)
2.6% (2013 est.)
9.7% (2012 est.)
2.6% (2012 est.)
59.21 million
797.6 million
note: extensive export of labor, note: by the end of 2012, China's
mostly to the Middle East, and population at working age (15-64 years)
use of child labor (2012 est.)
was 1.0040 billion (2013 est.)
Agriculture: 45.1%
Agriculture: 33.6%
industry: 20.7%
industry: 30.3%
services: 34.2% (2010 est.)
services: 36.1%
(2012 est.)
6.6% (2013 est.)
4.1% (2013 est.)
6% (2012 est.)
4.1% (2012 est.)
note: substantial
note: data are for registered urban
underemployment exists
unemployment, which excludes private
enterprises and migrants
56
Distribution of
family income Gini index
Budget
Industries
PAKISTAN
30.6 (FY07/08)
41 (FY98/99)
CHINA
47.3 (2013)
47.4 (2012)
Revenues: $29.71 billion
expenditures: $47.97 billion
(2013 est.)
textiles and apparel, food
processing, pharmaceuticals,
construction materials, paper
products, fertilizer, shrimp
Revenues: $2.118 trillion
expenditures: $2.292 trillion (2013 est.)
Industrial
production
growth rate
Agriculture products
3.5% (2013 est.)
Exports
$25.05 billion (2013 est.)
$24.71 billion (2012 est.)
textiles (garments, bed linen,
cotton cloth, yarn), rice,
leather goods, sports goods,
chemicals, manufactures,
carpets and rugs
US 13.6%, China 11.1%, UAE
8.5%, Afghanistan 7.8% (2012)
$39.27 billion (2013 est.)
$40.07 billion (2012 est.)
petroleum, petroleum
products, machinery, plastics,
transportation equipment,
edible oils, paper and
Exports commodities
Exports - partners
Imports
Imports commodities
cotton, wheat, rice, sugarcane,
fruits, vegetables; milk, beef,
mutton, eggs
world leader in gross value of industrial
output; mining and ore processing, iron,
steel, aluminium, and other metals, coal;
machine building; armaments; textiles
and apparel; petroleum; cement;
chemicals; fertilizers; consumer products
(including footwear, toys, and
electronics); food processing;
transportation equipment, including
automobiles, rail cars and locomotives,
ships, aircraft; telecommunications
equipment, commercial space launch
vehicles, satellites
7.6% (2013 est.)
world leader in gross value of
agricultural output; rice, wheat,
potatoes, corn, peanuts, tea, millet,
barley, apples, cotton, oilseed; pork; fish
electrical and other machinery, including
data processing equipment, apparel,
radio telephone handsets, textiles,
integrated circuits
Hong Kong 17.4%, US 16.7%, Japan 6.8%,
South Korea 4.1% (2013 est.)
electrical and other machinery, oil and
mineral fuels; nuclear reactor, boiler,
and machinery components; optical and
medical equipment, metal ores, motor
57
Imports - partners
Debt - external
Exchange rates
Fiscal year
Public debt
Reserves of
foreign exchange
and gold
Current Account
Balance
GDP (official
exchange rate)
paperboard, iron and steel, tea
China 19.7%, Saudi Arabia
12.3%, UAE 12.1%, Kuwait
6.3% (2012)
$52.43 billion (31 December
2013 est.)
2012 est.)
Pakistani rupees (PKR) per US
dollar 100.4 (2013 est.)
93.3952 (2012 est.)
85.194 (2010 est.)
81.71 (2009)
70.64 (2008)
1 July - 30 June
54.6% of GDP (2013 est.)
52.1% of GDP (2012 est.)
2013 est.)
2012 est.)
-$2.36 billion (2013 est.)
-$2.072 billion (2012 est.)
$236.5 billion (2013 est.)
vehicles; soybeans
South Korea 9.4%, Japan 8.3%, Taiwan
8%, United States 7.8%, Australia 5%,
Germany 4.8% (2013 est.)
$863.2 billion (31 December 2013 est.)
$737 billion (31 December 2012 est.)
Renminbi yuan (RMB) per US dollar 6.2 (2013 est.)
6.3123 (2012 est.)
6.7703 (2010 est.)
6.8314 (2009)
6.9385 (2008)
calendar year
22.4% of GDP (2013 est.)
26.1% of GDP (2012)
note: official data; data cover both
central government debt and local
government debt, which China's National
Audit Office estimated at RMB 10.72
trillion (approximately US$1.66 trillion)
in 2011; data exclude policy bank bonds,
Ministry of Railway debt, China Asset
Management Company debt, and nonperforming loans
$3.821 trillion (31 December 2013 est.)
$3.388 trillion (31 December 2012 est.)
$182.8 billion (2013 est.)
$215.4 billion (2012 est.)
$9.33 trillion
note: because China's exchange rate is
determine by fiat, rather than by market
forces, the official exchange rate
measure of GDP is not an accurate
measure of China's output; GDP at the
official exchange rate substantially
understates the actual level of China's
output vis-a-vis the rest of the world; in
58
Taxes and other
revenues
Budget surplus (+)
or deficit (-)
GDP composition, by
end use
Gross national
saving
12.6% of GDP (2013 est.)
China's situation, GDP at purchasing
power parity provides the best measure
for comparing output across countries
(2013 est.)
19.4% of GDP (2013 est.)
-7.7% of GDP (2013 est.)
-2.1% of GDP (2013 est.)
household consumption: 81%
government
consumption: 10.8%
investment in fixed
capital: 12.6%
investment in
inventories: 1.6%
exports of goods and
services: 12.7%
imports of goods and
services: -18.8%
(2013 est.)
12.7% of GDP (2013 est.)
13.3% of GDP (2012 est.)
12.9% of GDP (2011 est.)
household consumption: 36.3%
government consumption: 13.7%
investment in fixed capital: 46%
investment in inventories: 1.2%
exports of goods and services: 25.1%
imports of goods and services: -22.2%
(2013 est.)
50% of GDP (2013 est.)
51.2% of GDP (2012 est.)
50.1% of GDP (2011 est.)
59
16.3 Demographics, Geographical and Psychographic Comparison
INDEPENDENCE
PAKISTAN
14 August 1947 (from India)
LOCATION
Located in Southern Asia,
bordering the Arabian Sea,
between India on the east
and Iran and Afghanistan on
the west and China
AREA
Total area is 796,095 sq
km and 770,875 sq km is
land whereas 25,220 sq km
is water and the total area
of border is 7,257 km in
which Afghanistan border is
2,670 km, China 438 km,
India 3,190 km, Iran 959 km
COASTLINE & CLIMATE
Coastline is 1,046 km and
CHINA
1 October 1949 (People's
Republic of China
established); notable earlier
dates: 221 B.C. (unification
under the Qin Dynasty); 1
January 1912 (Qing Dynasty
replaced by the Republic of
China)
Located in Eastern Asia,
bordering the East China
Sea, Korea Bay, Yellow Sea,
and South China Sea,
between North Korea and
Vietnam
Total area is 9,596,960 sq
km and the land is
9,326,410 sq km whereas
water is 270,550 sq km and
the total area of border is
22,457 km in which
Afghanistan border is 91
km, Bhutan 477 km, Burma
2,129 km, India 2,659 km,
Kazakhstan 1,765 km, North
Korea 1,352 km, Kyrgyzstan
1,063 km, Laos 475 km,
Mongolia 4,630 km, Nepal
1,389 km, Pakistan 438 km,
Russia (northeast) 4,139 km,
Russia (northwest) 40 km,
Tajikistan 477 km, Vietnam
1,297 km respectively and
other regional borders
include Hong Kong 33 km,
Macau 3 km
Coastline is 14,500 km and
60
NATURAL RESOURCES
ENVIRONMENTAL
CONCERNS
climate is mostly hot, dry
desert; temperate in
northwest; arctic in north
Abundant in natural
resources, land, extensive
natural gas reserves, limited
petroleum, and abundance
of coal, iron ore, copper,
salt, limestone etc
The total of 26.02% land is
arable and the irrigated land
is 199900 sq km.
climate is extremely diverse;
tropical in south to subarctic
in north
coal, iron ore, petroleum,
natural gas, mercury, tin,
tungsten, antimony,
manganese, molybdenum,
vanadium, magnetite,
aluminium, lead, zinc, rare
earth elements, uranium,
hydropower potential
(world's largest)
The total of 11.62% of land
is arable and 629380 sq km
is irrigated.
Country is subject to
Frequent typhoons are
frequent earthquakes which observed (about five per
are sometimes severe
year along southern and
especially in north and west; eastern coasts), damaging
flooding along the Indus
floods; tsunamis;
after heavy rains (July and
earthquakes; droughts; land
August)
subsidence is also a
concern.
water pollution from raw
China contains some
sewage, industrial wastes,
historically active volcanoes
and agricultural runoff;
although most have been
limited natural freshwater
relatively inactive in recent
resources; most of the
centuries
population does not have
access to potable water;
air pollution (greenhouse
deforestation; soil erosion;
gases, sulphur dioxide
desertification
particulates) from reliance
on coal produces acid rain;
China is the world's largest
single emitter of carbon
dioxide from the burning of
fossil fuels; water shortages,
particularly in the north;
water pollution from
untreated wastes;
deforestation; estimated
loss of one-fifth of
agricultural land since 1949
61
POPULATION
GENDER RATIO AND
MEDIAN AGE
RELIGIONS
LANGUAGES
to soil erosion and
economic development;
desertification; trade in
endangered species
189,392,805 approx. 2014
1,393,783,836 as of July 1
est. with growth rate of
2014 with growth rate of
1.49%
0.44%
The males account for
According to the 2010
50.08% of the total
census, males account for
population whereas females 51.27% of China's
made up 49.2 % of the total 1.34 billion people, while
and the median age is 22.6
females made up 48.73% of
years
the total and the median
age is 35.7 years
Muslim (official) 96.4%
Atheist (Official)
other (Christian and Hindu) Buddhist 18.2%, Christian
3.6% (2010 est.)
5.1%, Muslim 1.8%, folk
religion 21.9%, Hindu .1%,
Jewish 1%, other 0.7%
(includes Daoist (Taoist)),
unaffiliated 52.2%
Diversity in language exists, Diverse languages are
Punjabi 48%, Sindhi 12%,
spoken which includes
Saraiki (a Punjabi variant)
Standard Chinese or
10%, Pashto (alternate
Mandarin (official;
name, Pashtu) 8%, Urdu
Putonghua, based on the
(official) 8%, Balochi 3%,
Beijing dialect), Yue
Hindko 2%, Brahui 1%,
(Cantonese), Wu
English (official; lingua
(Shanghainese), Minbei
franca of Pakistani elite and (Fuzhou), Minnan (Hokkienmost government
Taiwanese), Xiang, Gan,
ministries), Burushaski, and Hakka dialects, minority
other 8%
languages (see Ethnic
groups entry)
note: Zhuang is official in
Guangxi Zhuang, Yue is
official in Guangdong,
Mongolian is official in Nei
Mongol, Uighur is official in
Xinjiang Uygur, Kyrgyz is
official in Xinjiang Uyghur,
and Tibetan is official in
62
Xizang (Tibet)
LITERACY
URBANIZATION
GOVERNMENT
ADMINISTRATIVE DIVISIONS
The overall literacy rate is
57%
37% of total population is
urban with rate of
urbanization of 2.68%
annual rate of change
(2010-15 est.)
Federal republic
4 provinces, 1 territory*,
and 1 capital territory**;
Balochistan, Federally
Administered Tribal Areas*,
Islamabad Capital
Territory**, Khyber
Pakhtunkhwa (formerly
North-West Frontier
Province), Punjab, Sindh
note: the Pakistaniadministered portion of the
disputed Jammu and
Kashmir region consists of
two administrative entities:
Azad Kashmir and GilgitBaltistan
The overall literacy rate of
china is 96.4%
50.6% of total population is
urban (2011) with has now
exceeded to 70% with
rate of urbanization of
2.85% annual rate of change
(2010-15 est.)
Communist state
23 provinces (sheng,
singular and plural), 5
autonomous regions
(zizhiqu, singular and
plural), and 4 municipalities
(shi, singular and plural)
provinces: Anhui, Fujian,
Gansu, Guangdong,
Guizhou, Hainan, Hebei,
Heilongjiang, Henan, Hubei,
Hunan, Jiangsu, Jiangxi, Jilin,
Liaoning, Qinghai, Shaanxi,
Shandong, Shanxi, Sichuan,
Yunnan, Zhejiang; (see note
on Taiwan)
autonomous
regions: Guangxi, Nei
Mongol (Inner Mongolia),
Ningxia, Xinjiang Uygur,
Xizang (Tibet)
municipalities: Beijing,
Chongqing, Shanghai,
Tianjin
note: China considers
Taiwan its 23rd province;
see separate entries for the
special administrative
regions of Hong Kong and
Macau
63
16.4 PAK-CHINA NATIONAL COMPETITIVENESS COMPARISON
We have many automotive industries in Pakistan and China. But for the sake of comparison I am
comparing Pakistani Toyota-Indus Motors Company with Chinese, Shanghai Volkswagen as we are
having a visit experience of these two.
Toyota-Indus Pakistan
64
Shanghai Volkswagen
Our Group Members (from Left to Right Waqar, Ammad, Saneya, Adeel & Asim) during visit of Shanghai
Volkswagen Company
JOINT VENTURE
ANNUAL MANUFACTURING
CAPACITY
PAKISTAN
CHINA
Toyota Pakistan is a joint
venture of the House of Habib,
Toyota Motor CorporationJapan & Toyota Tsusho
Corporation- Japan
Shanghai Volkswagen group is
a joint venture of VolkswagenGermany and SKODA
Toyota Pakistan has an annual
manufacturing capacity of
approx 55,000 units
Shanghai Volkswagen has an
annual manufacturing capacity
of 1,935,000 units
65
ANNUAL PRODUCTION
NUMBER OF EMPLOYEES
CHALLENGES
Toyota Pakistan is producing
annually 62,000 units
Approx 2,350
Government policies towards
taxes on automotive industry
are also unstable, sometimes
govt allow import of 5-7 years
old vehicles which badly
affects the locally
manufactured sales.
Local manufacturing of Hybrid
cars is the need of the time as
they are Environment friendly
and Fuel Efficient.
USE OF IMPORTED VEHICLES
INVESTMENT
Shanghai Volkswagen is
annually producing 1,743,281
units
Approx 33,889
In big cities of China like
Shanghai, purchasing power of
citizens is good. They are tilted
towards luxury branded cars.
So Shanghai Volkswagen has to
work hard continuously in its
R&D sector in order to bring
innovative and stylish cars, so
that they can keep their name
in Chinese market.
In Shanghai and Beijing,
pollution is increasing day by
day so the local production of
more Environment friendly
cars is essential now.
Pakistani people are also tilted
towards imported Hybrid (Fuel
Economic) cars and they love
to drive them. Trend is
increasing day by day.
We have also seen in Shanghai
that 7 out of 10 cars are
imported. Shanghai people like
them because they are
branded, stylish and
comfortable. Popular imported
brands in Shanghai are
Porsche, Lexus, Mazda and
Mercedes Benz.
Rs. 13 billion
77,019 RMB
66
CONTEXT FOR FRIM STRATEGY & RIVALRY
16.5 COMPARISON OF PAKISTAN AND CHINA AUTOMOTIVE CLUSTER
Demand
17 CONTEXT FOR FRIM STRATEGY & RIVALRY
Government Support
GDP From Transport
PAKISTAN
CHINA
Pakistan’s GDP growth has led
to a surge in demand for all
types of vehicles and passenger
cars in particular. In the absence
of proper public transport, the
demand has to be met by the
automobile industry. Oil prices
have also declined which has
increased the demand for cars
The automobile industry has
always been able to gain the
support of the government on
the back of employment and
taxes. This sector has been
granted favorable policies even
when they have not met the
requirements of the customers
GDP From Transport in Pakistan
increased to Rs. 1.4 Billion in
2014 from Rs. 1.3 Billion in
2013. GDP From Transport in
Pakistan averaged Rs. 1.19
Billion from 2005 until 2014
Chinese GDP has grown
double
digits
and
the
resultant surge in demand has
placed a great opportunity on
the automobile industry to
meet it. The lowering of oil
prices has also led to a spike
in demand
Perception
In Pakistan, people struggle to
make ends meet and owning a
vehicle is not based on
perception. People buy a vehicle
when they have enough to
satisfy other needs
Car Registration
A study conducted by The
Economist
Intelligent
Unit
The Chinese economy has
been opened to the world but
its automobile sector has
been protected by the
government
GDP From Transport in China
increased to 22,475 CNY
Hundreds of Million in the
third quarter of 2015 from
14,529 CNY Hundreds of
Million in the second quarter
of 2015. GDP From Transport
in China averaged 6,998 CNY
Hundreds of Million from
1992 until 2015
Another factor which is
important for this industry in
China is that the Chinese
people perceive owning a
good vehicle increases their
social status and for them a
higher social status is very
important. They invest in
luxurious items even if they
do not really need them
China is experiencing a
slowdown: the world’s biggest
67
CONTEXT FOR FRIM STRATEGY & RIVALRY
Investments
Business Confidence
Models
Foreign Cars
4
predicts that new passenger car
registration in the country will
rise at 3.38 percent per annum
between 2012 and 2017, even
lower than the five percent
annual growth rate witnessed
during the last six dismal years
(Business Recorder)
In Pakistan, no new investment
by the big three companies has
been made as their production
capacity stands exactly the same
as it was in 2010
A reading above 50 indicates an
expansion of the manufacturing
sector compared to the
previous; below 50 represents a
contraction; while 50 indicates
no change. Pakistan’s improved
economic and security situation
has helped increase the index to
22% in the latest BCI Survey
Wave 11
New models are rare in
Pakistan. Suzuki lags even far
behind Toyota and Honda in this
area as it continues to produce
globally retired models while
the other two change their
model when it is successful in
other parts of the world.
Only Toyota sells a hybrid
vehicle in Pakistan while it is a
norm in most of the world to
have hybrid vehicles in your
collection
Imported cars are giving a very
tough competition to the Big
Three companies in terms of
sales and are capturing a lot of
market share. The imported
vehicles are mostly Toyota,
Honda and Daihatsu among
car market grew at its slowest
pace in three years with
luxury cars hit particularly
hard due to a corruption
crackdown and worries about
growth.
Appendix4
(Economist)
In China, a lot of investment
has been made in the
country’s automobile sector
as the government provided
incentives to set up plants in
the economic zones.
China currently is averaging
below 50 and it needs to
increase this index if it wants
to attract new business
(49.7% in December 2015)
The models being produced in
China are an imitation of the
foreign cars and no new
innovative features are being
added by the Chinese
manufacturers and they need
to add value to become
competitive
China’s auto policy ensures
that a foreign car maker has
to a have a Joint Venture with
a Chinese manufacturer to sell
an electric vehicle in China.
The Chinese company has to
have 51% share in such a case.
68
DEMAND CONDITIONS
R&D & Innovation
18 DEMAND CONDITIONS
Length of Strategies
others.
In 2014, the number of vehicles
imported in Pakistan increased
by 54.5%
Pakistan lacks investment in
research & development which
is evident from the fact that
hardly any new model or an
improvement is made through
Pakistan
Both Pakistan and China are
known for their short term
strategies. Due to ever changing
political scenario in Pakistan, no
policy or strategy is consistent
which is harmful for the
economy and investors
The market share of imported
vehicles in China was a
meagre 2.98% in 2014
China
also
lacks huge
investment in R&D as it only
imitates foreign cars. Some
Chinese automakers however
invest in R&D but there have
been
no
breakthrough
innovations by the Chinese
automakers
China also makes strategies
which are very short term in
nature and the government
controls everything
PAKISTAN
CHINA
Domestic Demand
As mentioned above, Pakistan
has a huge market for
automobiles and the domestic
demand has been consistently
growing as the economy and
security situation is improving
Export potential
Pakistan’s auto industry is not
yet ready to start exporting its
products to the world
Lifestyle
The Chinese economy is
slowing down and so is the
demand for cars. Chinese
market is fast saturating and
industry experts predict that to
increase sales, China needs to
export its vehicles.
Due to CPEC, China is expected
to export a lot of its products
to the world as trade routes
open up for it
Chinese people have started to
adopt a luxurious lifestyle, it
has led to a manifold increase
in the number of cars that we
see on the roads in the first
tier cities of China
Lifestyle of an average Pakistani
is expected to become better
and owning a car is part of a
better lifestyle. Currently, an
average Pakistani cannot afford
to buy a new car, let alone
satisfy other needs
Gross domestic savings (% of Gross savings (% of GDP) in
GDP) in Pakistan was last China was last measured at
measured at 7.51 in 2014, 51.28 in 2013.
Savings
69
DEMAND CONDITIONS
according to the World Bank
which is one of the lowest in the
region. It means that demand
goes up as GDP improves
Petrol Prices
Market Dynamics
Public Transport
Inflation
Currency
The prices of petrol all over the
world has led to a massive
increase in demand for cars and
Pakistan is no stranger to the
formula
Pakistan has strong local
demand for automotive parts
fuelled
by
major
auto
assemblers.
Pakistan is an agricultural
country and farm economics
play an important part in the
demand of automobiles
The mindset of Chinese people
is that they like to save for
their future spending in
absence of a good social
security system and the car
manufacturers
strategize
accordingly as it decreases the
demand.
Even though the economy is
slowing but decrease in
petroleum products prices has
also increased the demand for
cars in China
The factors which negatively
affect
the
demand
of
automobiles include Even-Odd
car ban. This policy means that
vehicles with even and odd
number license plates will be
allowed to drive on alternate
driving days to ease the traffic
flow and hence the pollution in
these first tier cities
Emphasis of the Chinese
government is on the use of
public transport system of
buses and subways. The public
transport system in the first
tier cities of China is very
masterfully built and hence
can easily drive demand down
for automobiles
In
Punjab,
Pakistan,
the
government has started to build
public transport projects like
Metro Bus and Orange Line Rail
Transport which can decrease
the demand for automobiles but
in other provinces, no public
transport projects are being built
which means that demand for
automobiles will increase in
those provinces
CPI is spiraling downward in Another factor which can
Pakistan which is a potential reduce the demand for
demand booster
automobiles is the rising
inflation in China and the
saving power of the customer
can decrease as a result which
will result in reduction of
demand
Pakistan has not pegged its Appreciation of RMB against
exchange rate against stronger the Dollar also hinders export
currencies which makes its own which is also a determinant of
currency volatile and hence demand. There is a lot of
70
71
affects demand
Future of HCV
Future of automobile sector of
Pakistan belongs to the HCV
category as a vast network of
roads is to be developed under
CPEC
Brand Power
Pakistan does not have its own
car manufacturer and hence
people tend to import higher
brand value vehicles to increase
their social status
PAKISTAN
20 RELATED & SUPPORTING 19
INDUSTRIES
Localization
Government of Pakistan is
making policies that are aiming
towards localization of the
components
industry.
An
example is the milestone based
localization for new entrants
which
has
already
been
discussed
Inter & Intra Cluster The main auto parts are being
Co-operation
manufactured in Pakistan but
we see a lack of inter and intra
cluster cooperation which is due
to lack of importance given to
the parts manufacturers on part
of the government and the
manufacturers
themselves.
PAAPAM was meant to do the
same but since their voices were
never really heeded, they have
lost their significance
Competitive
Pakistan
lacks
competitive
Advantage
advantage in any of the products
being made locally. The bases of
politics played by China in
determining its exchange rate
As the development in China
has slowed down and the
market
has
reached
a
saturation point, China can
export its HCV to Pakistan and
other developing countries
The Chinese vehicles tend to
have a lower brand power as
compared to the competition
from other parts of the world
and the Chinese customer also
feel that this is the case and
hence they import vehicles for
their usage as it will also help
increase their social status
CHINA
Chinese government also
promotes localization of the
automotive industry and the
Auto Policy 2004 is an
example of it
The
whole
automobile
industry in China is closely
knit together and they are
very strongly connected with
each other. There is a lot of
cooperation
and
the
supporting
industries
complement the automobile
products. CAAM protects the
interest of both the industries
There seems to be a lack of
competitive advantage in this
industry as well as most of
RELATED & SUPPORTING INDUSTRIES
Utilities
Innovation
Investment
Regulations & Tax
Competition
competitive advantage are
quality, cost efficiency and
speed.
Local
component
manufacturers are known for
their low quality and hence low
price products
The local industry also faces very
high cost of utilities such as
electricity and gas as well as
inadequate supply of these basic
utilities
the models of the vehicles
that are being produced are
imitation of foreign vehicles
and there is no room for the
supporting industries to play
and innovate
The Chinese industry also has
to pay a very high cost of
utilities which affects their
margins and many firms go
out of business annually due
to this reason
As mentioned before, the auto The Chinese auto industry
makers
in
Pakistan
lack also
lacks
breakthrough
innovation and hence the innovation
supporting industries also lack
innovation
Again, Pakistani industry lacks There seems to be a general
investment for the future
lack of investment for the
future on part of the
supporting industry. They
invest in new technology not
until a new model is being
introduced
Also burdening the local industry Tax rate in China is lower at
are the many tax regimes 25% compared to 32% in
prevalent in the country. Federal Pakistan
and provincial governments
charge different tax rates which
places some producers at an
advantage over the other
producers in the country.
Almost every part of every China has a strong related
vehicle made in Pakistan has industry which makes almost
competition
from
foreign all parts of every vehicle
products.
Most
of
the produced and sold in China
components imported into the and they even export their
country are made in Thailand products all over the world
and Thai Baht has depreciated
significantly against Pakistani
Rupee in the last 2-3 years which
has made these components
even cheaper.
72
21 FACTOR INPUT CONDITION
FACTOR INPUT CONDITION
PAKISTAN
CHINA
Labor Cost
Pakistan is blessed with a very
young labor force of 77% below
the age of 35 (Statistics, 201314). Due to prevalent poverty in
Pakistan, this young force is
bound to work at cheaper
rates. Hence, the automobile
sector can capitalize on this
cheap labor force and keep its
cost down which also leads to
higher economies of scale
Skilled Engineers
Pakistan lags far behind the
world due to a lack of skilled
automotive engineers and ends
up
importing
Japanese
engineers which increases the
cost
Pakistan lacks capital which is a
very important factor of
production so it depends on
investors from outside to invest
in Pakistan
China’s
main
competitive
advantage has been its very
cheap labor cost but now that
they
have
an
ageing
population, this competitive
advantage is moving towards
becoming
a
competitive
disadvantage as more and
more fresh graduates are
earning a very high starting
salary in absence of young
labor. The average starting
salary
for
a
fresh
undergraduate degree student
is about 4,500 RMB and most
of these manufacturing units
cannot hire this fresh talent
China also has a great number
of very skilled automotive
engineers who are able to
imitate the foreign brands and
provide technical support
whenever it is needed
It also has an abundance of
factors of production such as
land, labor & capital which
makes
it
an
ideal
manufacturing country but due
to the expensive labor
element, they are facing
problems in maintaining China
as the hub of all the
automotive industry
Factors of Production
73

Competitive Analysis of Auto Sector in Pakistan and China

Transcription

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