Pak Suzuki Motor Company Limited The war of high segment cars.
1. Abstract: 1. Abstract: Suzuki Company needs to focus more positively on higher segment of the automobile industry which is 1300CC to 1800CC cars. The company is doing well in low segment (800cc to 1000cc) cars in which they have got the highest market share. Suzuki has got the highest market share (62 percent market share), needs to think about high segment seriously. One of the foreseeable events, the third phase is “Global Era” for Pakistan automobile industry, this era starting from 2012 onwards in which the auto industry will transform itself for the purpose of becoming a global player by maximizing their value added production, in that specific area Pak Suzuki has no specialties. With the start of “Global Era Phase” due to mass production level the industry experts are anticipating to accomplish the huge scales which is supported by the size of GDP of $210 Billion by 2012 and Per capita income reaching to $ 1,300. Globalization and dynamic environment leads the auto industry towards the development
of
skilled
people,
acquisitions,
technological
development,
advancement of Infrastructure and living conditions, all these things push the auto industry to Produce fuel efficient, high standard and environment friendly vehicles, and at the same time meeting or exceeding customer expectations. The consumer still have a lot of concerns about quality, safety and after sale service along with relatively less fuel efficient engine technologies and features of the cars are still the growing challenges for the Pak Suzuki Motor Company Limited. The major problem that the Suzuki Company currently facing is in the form of Suzuki LIANA, which does not fulfill the customer’s needs and not able to sustain the market it was made for. Although the company has continued its journey in higher segment, recently company launched a new model Suzuki SWIFT in the market, and it looks like an attractive move of the company in the 1300cc class. But still company has done nothing to compete with HONDA and TOYOTA. Key words: Pak Suzuki Motor Company (PSMC), Auto Industry Development Program
(AIDP), higher segment (1300cc to 2000cc cars), low segment (800cc to 1000cc cars), EDB (engineering development board), PAMA (Pakistan Automotive Manufacturers Association).
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2. History: Pak Suzuki Motor Company Limited is a joint venture between Pakistan Automobile Corporation and Suzuki Motor Corporation (SMC) - Japan. The Company was incorporated as a public limited company in August 1983 and started commercial operations in January 1984. Initially SMC got the market share of 12.5% and with the passage of time increased to 73.09%. Pak Suzuki has annual production capacity of 150,000 and with largest manufacturing facilities, PSMC is considered to be the biggest player in automobile business. The company has a huge product line which includes cars, small vans, Cargo vans and Motorcycle. PSMC followed the aggressive policy of Indigenization, The capability to manufacture a product independently within a country instead of relying on foreign manufactures or suppliers. Suzuki vehicles have a healthy local content up to 72%. It is because of strong support of vendors. PSMC has the Dealers network on a large scale consisting of 3S (Sales, Service and Spare Parts) facilities across Pakistan. PSMC also involved in social responsibility in which caring for the Environment Pak Suzuki was the first to introduce Factory fitted CNG vehicles. PSMC always attempted to achieve a goal aggressively for the purpose of developing a society by increasing industrialization and improving the quality of life and living standard by creating job opportunities and with the combined efforts of all the dealers, vendors and Pak Suzuki employees. The major automobile companies in Pakistan have been set up as joint venture with foreign multinational companies. Joint Ventures for Automotive Vehicles (See Exhibit: 1)
(Exhibit: 1) Joint Ventures for Automotive Vehicles: Company
Joint Venture
Product
Indus Motor Company
Toyota, Japan and Daihatsu, Japan Honda, Japan Suzuki, Japan Suzuki, Japan
Toyota and Daihatsu Cuore cars Honda Cars, Honda Motorcycles Suzuki cars Suzuki Motorcycles
Nissan, Japan Kia and Hyundai, Korea Fiat, Italy
Cars and Truck Cars and LCVs Cars
Atlas Honda Ltd. Pak Suzuki Suzuki Motorcycle Pakistan Ltd. Ghandara Nissan Dewan Farooq Motors Ltd. Raja Motor Co.
Source: PAMA
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3.
Suzuki’s product line;
SWIFT (1300cc), LIANA (1300 & 1600 cc), CULTUS (1000cc), ALTO (1000cc), MEHRAN (800cc), APV (1500cc).
4.
Suzuki’s Vision and Mission;
4.1
VISION:
Excellence in all respects.
4.2
MISSION:
Our mission to realize this vision is, to provide automobile of international quality at competitive price, to improve skills of valued employees by imparting training and inculcating in them a sense of participation, to achieve maximum indigenization and promote Pakistan`s automobile vending industry. To make valuable contribution to social development of Pakistan through development of industry in general and automobile industry in particular.
5. Industry analysis; Pakistan auto industry faces a “Preparation Phase 1985 -05” which was also called deletion programs. In these programs formulation and implementation of compulsory local content conditions was adopted. Functions of these programs were on the basis of Industry Specific Deletion Programs (ISDPs) and Product Specific Deletion Programs (PSDP). Under these programs assembler had an option to choose components from a basket based on their individual values. The EDB had the responsibility to check whether the targets are achieved by conducting audit and also check the shortfalls of deletion targets. The auto industry is going to face the “Development Phase 2005-12” that phase consist of developing different strategies to transform the industry into a new competitive environment. In this phase the main focus of the government was to facilitate the environment for the auto industry to enhance their production capacity to achieve mass production. In this phase more focus was on the issues of human resource development, R&D, technology acquisition, competitiveness, innovation, creativity and investment rather than tariff management, although it remains one of the valuable tools for policy makers. During the preparation phase, major role for the assemblers was to transfer technologies, provide help and assistance for developing the vendors, enhancing the management skills to fulfill market and consumer needs. The import of reconditioned cars remained low because of high import duties. High Page 3 of 15
import of used cars in the last 2 to 3 years was however, to bridge temporary demand-supply gap. In 2006 was indeed a Systematic shift in the business environment in the form of tariff rates. Assemblers was not forced to implement local content conditions, they have got the choice of buying the vehicles components at most competitive price, quality and improved supply chain. (See exhibit: 2)
(Exhibit: 2) Import of Vehicles Tax Slabs: Type of vehicle (meant for transport of passengers) Income
Customs Tax on Sales Tax paid value
Duty on Value Assessed
(See Para 13below)
Sales
Special Federal Used vehicles (Not covered under Excise Duty on duty special regime) paid value
From 1601 CC to 1800 CC (Other than Asian makes) 15.00%
5.00%
1.00%
From 1601 CC to 1800 CC (Jeeps)
15.00%
5.00%
1.00%
From 1801 CC and above
5.00%
1.00%
New Cars (Regular import or under aforesaid three schemes)
50.00%
15.00%
5.00%
1.00%
55.00%
15.00%
5.00%
1.00%
60.00%
15.00%
5.00%
1.00%
60.00%
15.00%
5.00%
1.00%
15.00% Up to 800 CC From 801 CC to 1000 CC From 1001 CC to 1300 CC From 1301 CC to 1500 CC
Source: Import of Vehicles Taxpayer’s Facilitation Guide (FBR) table 3.
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One of the foreseeable events, the third phase is “Global Era” for Pakistan automobile industry, this era starting from 2012 onwards in which the auto industry will transform itself for the purpose of becoming a global player by maximizing their value added production. The most important benefit auto industry has in the form of established vendors, huge number of vendors; they have developed themselves during the second phase. Now they are in a position to recognize the design and technicalities require for manufacturing components in house or through other vendors. As auto industry is going to become a global player, so the role of vendors is very much important in the global supply chain, because industry experts are expecting that many of the overseas assemblers outsource manufacturing of components to them. With the start of “Global Era Phase” due to mass production level the industry experts are anticipating to accomplish the huge scales which is supported by the size of GDP of $210 Billion by 2012 and Per capita income reaching to $ 1,300. Globalization and dynamic environment leads the auto industry towards the development of skilled people, acquisitions, technological development, advancement of Infrastructure and living conditions, all these things push the auto industry to produce fuel efficient, high standard and environment friendly vehicles, and at the same time meeting or exceeding customer expectations. The overseas companies are now looking to export and manufacturing cars by using Pakistani market as a regional hub. The consumers still have a lot of concerns about quality, safety and after sale service along with relatively less fuel efficient engine technologies and features of the cars are still the growing challenges for the local automobile industry. Pakistan auto sector operates on a large scale and they have got the investment of Rs 98 billion, and this sector contributed about Rs. 63 billion as indirect taxes. Auto sector also creates lot employment opportunities as it employs about 192,000 people directly and around 1.2 million indirectly. Pakistan auto industry also playing an important role in the development of an economy, as the sector paying approximately Rs. 08 billion per year in the form of taxes and contributed more than Rs 30 billion to countries GDP. Although the industry is going slowly but it has got the high potential in the coming years. Pakistan’s total share of car and commercial vehicles remains 0.37% of the world production during the year 2006-07. (See exhibit: 3)
(Exhibit: 3) Page 5 of 15
Installed Capacity of Cars and Light Commercial Vehicles (LCVs): Organization
Pak Suzuki Motor Co. Ltd, Karachi Public Limited Company with 72.82% shares and management held by Suzuki Motor Corporation, Japan. Indus Motor Co. Ltd, Karachi Joint venture between Habib Group, Pakistan, Toyota Tsusho Corporation, Japan (Toyota and Cuore Honda Atlas Cars (Pak) Ltd, Lahore Joint venture between Atlas Group Pakistan and Honda Motor Co. Japan. Ghandhara Nissan Ltd Technical cooperation agreement with Nissan Motors, Japan. Dewan Farooq Motors Ltd Technical cooperation agreement with Hyundai Corporation, South Korea.
Capacity Unit/Annum
150,000
50,000
20,000
6,000
25,000
251,000
Source: PAMA (Updated to FY. 2007-2008)
6. Recent Developments in Automotive Industry; Pak automotive industry has recently created system enhancement, technological development and skills improvement on the basis of forward and backward integration, and all these things provide help to the rest of technical and engineering sector as well. Because local material is used in manufacturing, so industry’s backward integration for materials and tooling’s such as steel, aluminum, copper, plastics & chemicals, rubber & glass and its forward linkages in the form of retail & wholesale, dealerships & logistics, workshops & maintenance, filling stations, finance & insurance, marketing, advertising and consultancy services and trade, it stand to reason that all these things plays a vital role for the development of auto industry in future as well. If we look at the other side of the picture, material prices are declining in overseas market so companies can reduce per unit cost and increase profits.
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7. Government Reforms for Automotive Industry; Now
automotive
industry
is
becoming
a
global
thespian
by
achieving
competitiveness, critical mass production and contribution to Pakistan s’ GDP 5.6%
by 2012 through attracting domestic and foreign investment in the auto industry and development of human resource through a well-constructed policy framework and for the development of new innovative technology. Over next five years which are offering many challenges and obstacles, important is being continuing the high growth, achieving competitiveness, investment in compliance to safety and quality management standards. The goals set by the government and automotive industry together can only be achieved by inclusive policy development through which cross sectional issues can be addressed. The government of Pakistan has initiated the Automotive Industry development Program (AIDP) for the sake of address issues including the predictability of auto production and stable tariff for the next five years. The (AIDP) undertaken by the government for the development of the automotive industry. The Engineer Development Board (EBD) has the authority for the implementation of this program to boost car production capacity to half a million units as well as attract the investment of US$ 3 Billion and reach the auto export target of US$ 650 Million. The low cost production issues to compete in international market, adopting new global emerging trends and dynamics of fuel efficient and environment friendly vehicles, and the contribution in GDP remain dominant in the policy environment. As fuel prices increasing rapidly, demand to produce fuel efficient and hybrid cars are also under the consideration. The role of foreign investors and their interest in the automotive industry speaks about a lot of potential and growth opportunities for production and export. Pakistan Automotive industry has positioned to become a global choice for outsourcing and becoming the part of global supply chain. Government of Pakistan had undertaken major initiatives in the form of National Trade Corridor Improvement Program (NTCIP) that reduces inefficiencies like reduction the cost of doing business, increasing economic growth and increasing export competitions.
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8. Competition; 8.1
Indus Motors company Pakistan :
Indus Motors Company Pakistan production facilities are located at Port Bin Qasim Industrial Zone near Karachi in an area of over 105 acres. Indus Motor Company s’
plant is the only manufacturing site in the world where both Toyota and Daihatsu brands manufactured. Huge investments are made to build its production facilities based on state of art technology. To ensure high degree of productivity, Toyota production systems are implemented. Indus Motors Company Toyota production line includes six variants of the newly introduced Toyota Corolla, Toyota Hilux Single Cabin 4x2 and versions of Daihatsu Cuore.
8.2
Toyota Corolla:
The Toyota Corolla has been achieving success as a strong brand science 1970 in Pakistan when Toyota Corolla was not manufactured in Pakistan but at the import basis this brand tremendously took place in the Pakistan automotive market. The most famous series of Corolla are 1976, 1978, 1986 and the list of early series of the models is still considered as powerful and memorable brands. Toyota Corolla assembling progressive manufacturing and marketing in Pakistan since July 01, 1990. Corolla brand has already established in Pakistan auto market. So there was no hard struggle made to establish the brand. Toyota Corolla is well standardizing product in the market and its current series is 1300cc XLI, GLI Cruisetronic in each of the product they provide state of the art features, reliability and serviceability to make more loyal customers.
8.3 Honda: Honda Cars Pakistan Limited is a joint venture between Honda Motor Company Limited Japan and the Atlas Group of Companies Pakistan. The joint venture was initiated on November 1992 and joint venture agreement was signed on August 1993. Science the commencement of production in 1994, the company has produced and sold more than 150,000 cars until October 2008. The company also regularly conducts service campaigns to facilitate customer s’ need for service. This has given to customer’s absolute confidence in the product evident from the increasing sales
volume. It is the constant endeavor of the Honda Atlas Cars (Pakistan) Limited to achieve No.1 customer satisfaction. Honda Atlas Cars (Pakistan) Limited is committed to meet customer satisfaction and to provide good value of money.
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9. Increasing trends in higher segments ; After the disaster of September 11, 2001 increased in the home remittances has resulted in increased liquidity in the market therefore, people started to invest in cars. At that time growth in high capacity car s’ segment increases. It becomes easy
to purchase new cars due to cars loans provided by banks. In order to fulfill rising demand the automotive production capacity increased. Because of that mass production the domestic car engine technology lags years behind the world markets and people were unable to get the benefits of new technology. (See exhibit: 4).
(Exhibit: 4) Production of Cars:
production of cars:1300cc, 1000cc, 800cc 200,000 180,000 160,000 140,000
d n a s 120,000 u o h T 100,000 n i s t i n U
80,000
Units in Thousand
60,000 40,000 20,000 0
Source: PAMA
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10.
Problems of Suzuki in Higher Segment Cars;
Suzuki has more focused on price competitiveness in higher segment of cars rather than quality and innovation. Suzuki has more than 50% share in low segment vehicles but lacking far behind in higher segment cars. The development of highly skilled human resource and partnership with venders, acquisition of technology and infrastructure, incorporating the environment changes will drive the automotive industry to produce high standard, fuel efficient and environment friendly vehicles in the better price range along with satisfying the customer requirements and expectations. The consumers concern on quality, safety and after sale services along with relatively less sophisticated engine technologies and features are still the growing challenges for the automotive industry of Pakistan, especially for Pak Suzuki Motors Company Limited. Major setbacks to Pak Suzuki Motors Company Limited (PSMC) was in the shape of Suzuki LIANA and BALINO, which was not able to compete neck to neck competition with its competitors, Honda city, Honda civic and Toyota corolla because of unable to meet the customers’ expectations and could not grasp the market. But PSMC didn’t
stop its journey there, and now Suzuki SWIFT has recently been launched in the market, which seems to be an attractive offer for the auto market in 1300cc segment, but still PSMC has nothing to compete with HONDA and TOYOTA. The gaining advantages of loyal customers before starting production of Toyota Corolla brand in Pakistan, they didn’t need to much hard struggle to give awareness and
make customers because of strong brand loyalty perception. So if we are talking about higher segment (1300cc to 2000cc) cars Toyota Corolla is the leader in Pakistan followed by Honda and then Suzuki. Now Suzuki is focusing upon production to meet the market demand in small 800cc and 1000cc cars segment. The reason was deletion program is replaced by tariff based program from year 2006 to encourage local automobile part manufacturers to enhance their productivity and decrease in the price as there are incentives in term of using local parts. As far as this is helpful in declining the price of cars but on the other hand it cause serious problems in quality and innovation. Pak Suzuki has greater advantage then Honda in this policy because the Suzuki has a perception of low cost normal quality car by using local manufacturing auto parts. Suzuki has not serious decline in its perception if it uses the local manufactured auto parts if Honda uses local parts their perception of high quality could decline. So decline in technology will destroy the customer s’ confidence on brands and cons umer will shift
focus on imported vehicles.
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The concept of CNG (compressed natural gas) in Pakistan also raises the demand of automobiles in the country because CNG is cheaper than petrol. Pakistan now becomes the first country in the world who consumes the CNG in automobiles. Suzuki lays its focus by serving the low segments by introducing CNG kits in cars but on the other side now people became very conscious to buy the car even invest in the car market and rapid growth in the consumer financing from banks and other companies provide the opportunity to buy latest models having more innovative features compare to international top brands as they also reflect the status symbol. (See exhibit: 5)
(Exhibit: 5) CARS (Number of units sold) CARS: Number of units sold
200506
200607
200708
200809
200910
201011
201112 July'11Jun'12
1300-1600cc (2000cc Diesel) Honda Honda (civic)
11,998
6,513
5,762
4,662
5,908
6,365
4,977
Honda (city)
16,136
11,848
8,439
6,482
8,212
9,121
7,142
Honda Total: No. of units
28,134
18,361
14,201
11,144
14,120
15,486
12,119
26,760
43,510
41,111
46,207
sold
Toyota Toyota Corolla (No. of units
30,527
35,762
33,640
sold)
Suzuki Suzuki (Baleno)
3,173
0
0
0
0
0
0
Suzuki (Liana)
4,571
6,067
8,439
851
1,025
470
450
Suzuki (Swift)
~
~
~
~
2,353
4,080
7,040
Suzuki Total (No. of units
7,744
6,067
8,439
851
3,378
4,550
7,490
46,015
47,896
50,518
28,462
50,266
50,211 61,187
sold) Grand Total Source: PAMA
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(Exhibit: 6)
1300cc (No.of units sold) 50,000 45,000 40,000 35,000 30,000 25,000
Honda Total (no.of units sold)
20,000
Toyota (Corolla no.of units sold)
15,000
Suzuki Total (no of units sold)
10,000 5,000 0
Source: PAMA Pakistan automotive industry is not equipped to undertake research and development due to relatively weak technical base and risk evasiveness of producers. Technology acquisition costs vary with the type and extend of sophistication. Cutting edge technology transfers are difficult and may be the major factor. Toyota transfer technology directly to local venders for manufacturing parts. Manufacturing facility is audited first to judge the potential of a local vendor before permitting him to produce sample of the part for testing approval. Japan is ready to provide technical assistance up to certain level, but still no adequate infrastructure and skilled human resource has been developed to meet the desired standard. An average of only 45% parts of various models has been permitted to be developing locally by Toyota after their extensive test trail in Japan. Due to non-availability of expensive quality control equipment, all safety components are imported. Highly trained engineers and technicians are also sending to Toyota Behren Training Center for further skills enhancement. Manufacturing knowhow is transferred directly to local vendors as per their qualification and skills, whereas assembly and operational knowhow is provided to Indus Motors Company. Due to the increasing demand of automobile rapidly and non-availability of strong competitors in local market, the company remains unable to meet the technological assistance requirements of local vendors to the desired level. Still no adequate Page 12 of 15
quality control standards are emphasizing to meet the required standards of the automobiles. This has result in consistently deteriorated quality of the finish products especially in Mehran, Bolan and Alto vehicles. The benefits achieved by Suzuki include saving of foreign exchange through development of 65% parts locally. Local industry is promoted and develops resulting in employment benefits and economic boost as per Pakistan government policy but it results in lack of innovation and major quality initiatives the Suzuki s’ product line that cause the failure of the cars in higher
segments. Honda Motors Company Japan is getting only 5% parts manufactured locally, due to non-implementation of government policy (AIDP) forcefully and avoid giving any design and manufacturing knowhow to local vendor industry. They are opinion that due to non-availability of research and development infrastructure, it is extremely default for Honda to provide any manufacturing technology to Pakistan. Instead of relying on local vendors, Honda has continued to improve their vehicle parts. It can be a short term advantage for them but in the long run they are losing credibility in local market through increased production cost, depreciation of currency value and non-availability of local vendors for manufacturing their vehicle parts. By the start of “Global Era Phase” the automotive industry is expected to achieve the high scale of production level and supported by the size of GDP of US$ 210 Billion by 2012. Global flattening, information systems and development of technologies, improvement of infrastructure and living conditions will drive the automotive industry to produce high standard, fuel efficient and environment friendly vehicles in a better price range and satisfying consumer’s expectations. It is a major challenge
for the local car assemblers to achieve the acceptability of vehicles in the global market. They need to be more concern about these challenges. (See Exhibit: 7)
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Sales of Cars (Exhibit: 7) CAR
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
1300-1600cc (2000cc Diesel) Honda (Civic) Honda (City) Suzuki (Baleno) Suzuki (Liana) Suzuki (Swift) Toyota (Corolla) 1000cc Suzuki (Khyber/ Cultus) Suzuki (Alto) Hyundai (Santro Plus) 800c Daihatsu (Cuore) Suzuki (Mehran) Suzuki (Bolan) TOTAL CARS:
11,998 16,136 3,173 4,571 ~ 30,527
6,513 11,848 0 6,067 ~ 35,762
5,762 8,439 0 8,439 ~ 33,640
4,662 6,482 0 851 ~ 26,760
5,908 8,212 0 1,025 2,353 43,510
6,365 9,121 0 470 4,080 41,111
July'11Jun'12 4,977 7,142 0 450 7,040 46,207
21,390 16,823 7,031
29,837 21,988 3,470
27,563 19,097 2,227
9,198 6,550 404
12,658 10,794 244
11,428 11,932 0
13,693 16,288 0
7,883 35,982 10,451 165,965
12,776 37,007 15,566 180,834
12,204 35,526 17,209 164,650
5,852 13,421 8,664 82,844
5,301 22,513 11,439 123,957
6,007 24,119 13,311 127,944
3,857 35,131 22,540 157,325
Source: PAMA Market Shares for FY-Year 2011-2012 (Exhibit: 8); CARS
Units Sold (nos.)
Market Share (%)
Suzuki
95,142
62%
Toyota
46,207
30%
Honda
12,119
8%
Hyundai
0
0%
Nissan
0
0%
Kia
0
0%
Total
153,468
100
Source: PAMA
Cars Suzuki Toyota Honda Hyundai Nissan Kia
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11.
In future;
One of the foreseeable events, the third phase is “Global Era” for Pakistan
automobile industry, this era starting from 2012 onwards in which the auto industry will transform itself for the purpose of becoming a global player by maximizing their value added production. . With the start of “Global Era Phase” due to mass
production level the industry experts are anticipating to accomplish the huge scales which is supported by the size of GDP of $210 Billion by 2012 and Per capita income reaching to $ 1,300. Globalization and dynamic environment leads the auto industry towards the development of skilled people, acquisitions, technological development, advancement of Infrastructure and living conditions, all these things push the auto industry to Produce fuel efficient, high standard and environment friendly vehicles, and at the same time meeting or exceeding customer expectation. To fulfill the above stated requirements it means more focus on product development, technology, R&D, and innovations, Pak Suzuki lacks the expertise in all these areas, so in order to earn huge profits in higher segments and to remain in competition with Toyota and Honda, strategically Pak Suzuki has to think about it seriously.
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