Drive to Nowhere?

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(Printed in Aurora Magazine, July-August issue)

By Jahanzaib Haque

In a time of global recession, extreme inflation, and economic uncertainty, the once-booming automobile industry has fallen on hard times. According to the Pakistan Automobile Manufacturers Association (PAMA), 2008 witnessed a 55% drop in overall automobile sales as compared to 2007, while as recently as the first quarter of 2009, sales have further dropped by 40% compared to the same period last year.

Similarly, sources in the banking sector indicate the issuance of auto finance loans has slowed down to levels previously recorded in 2003, and markup rates on such loans have returned to 19 to 20% from rates that were as low as seven percent during the boom of 2005-06.

Demand has dried up, production levels have plummeted, and in the wake of such a sharp decline, car manufacturers, dealers and the auto-finance banking institutions are left pondering the central question: what went wrong and how do we fix it?

While globally car manufacturers have been busy marketing automobiles for an increasingly price conscious consumer with desperate, albeit innovative ideas such as Chrysler’s, ‘buy one get one free’ deal or Hyundai’s ‘return car if job lost’ promotion, car manufacturers in Pakistan have had their hands tied by a faltering rupee and a consequent rising cost of production.

The 40% overall jump in car prices in the last half of 2008 also marked a significant change in consumer behaviour. According to inside sources, one of the biggest changes witnessed has been a shift down towards smaller segments; a person who would have purchased a 1600cc car is now buying a 1300cc car, while the 1300cc purchaser has moved down to 1000cc and so on.

So how does one sell cars in such a climate?

For Suzuki, a recent price reduction of up to Rs 50,000 has been introduced for all their models, although inside sources say this strategy is less about playing the market and more about trying to recover the losses incurred from reduced sales. Being the largest local car manufacturer, Suzuki has particularly borne the brunt of the downturn as the company had made massive investments based on projected sales volumes which never materialised.

Aside from Suzuki, Nissan also chose to reduce the price of the Sunny by a significant Rs 100,000 following its launch this year, but even such a reduction has not yielded the desired results due to the depressed business conditions.

According to Muazzam Pervaiz Khan, Senior Executive Director, Marketing and Sales, Ghandhara Nissan, the price drop was introduced because the Sunny’s original launch, planned for 2008 was delayed due to political and economic turmoil, forcing its launch to coincide with that of the new Toyota Corolla and Honda City. In order to remain competitive (and partially due to the enormous cost of storing CKD kits for another year), the Sunny was launched and a price reduction was introduced.

“We did a print campaign highlighting the price reduction,” says Khan.

“We tried multiple forms of direct marketing to potential buyers but the response was still not good.”

In Khan’s view, such a state of affairs indicates that recovery in the market will take a little longer than expected.

“People have got money but they don’t want to spend it or keep it in Pakistan right now. We haven’t really been hit by the global recession; people have not lost their jobs in the kind of numbers we have seen abroad, but the market will only bounce back when it is perceived that we have a stable government and economy.”

While Nissan’s example suggests a wait-and-see approach, some car manufacturers are shifting from the ATL communication familiar to the industry, to the more subtle BTL and direct marketing approaches. Such a shift is partly to better engage the customer and spread awareness – and partly due to budget limitations.

A case in point is the new Honda City launched to capture the still existing higher end of the market. Honda has not only built the new City’s campaign around the conventional print campaign but have also used auto journalism as a means to stimulate the market.

One innovative step has been to invite members of the press to visit their distribution centres and test drive the new City for the inevitable (though not forced) review and the corresponding generation of word of mouth.

Reshaping the current downturn from challenge to opportunity is as one Honda representative put it “a zero sum game in the market right now. We believe that introducing a new model at this particular time will help capture customers from other brands.”

For Honda, the focus has shifted to marketing directly to customers registered in their internal network, rather than following a shotgun approach of communicating to a general market. The aim is to coax existing customers to purchase cars on an individual case-by-case basis – a thought process which resonates in the auto-financing sector as well.

“During the 2003-04 boom, banks did not follow a sustainable business model,” says Zubina Sadick, General Manager, House and Car Finance, HBL.

“When the large foreign banks went into car financing they did not have the distribution networks to support their growth. Their sales and marketing was almost completely conducted by outsourced direct sales agents, or through a lax referral system for loan applications. This is why the banks were hit so hard by non-performing loans which included both fraud and default.”

In light of these mistakes, Sadick says banks have now shifted the focus of their marketing efforts to their existing relationships and accounts; in HBL’s case more than 80% of their current car financing is being conducted through this method.

“We need to take a risk on our existing relationships,” says Sadick.

“Unlike the past, we have now amassed a wealth of information on these customers and we even have access to their accounts, so it is better risk, better credit. We may not be building huge portfolios, but what we need in this period is sustainable profitability.”

Additionally, due to the sheer number of exposures and negative consumer portfolios, Sadick believes banks will be forced to reach out to previously untouched markets in towns and cities where new customers can be found. However, she is quick to point out that this expansion would spring from existing networks, and only once the infrastructure for such growth is in place.

Despite such talk of expansion, both car financers and manufacturers believe the coming year will be challenging, to say the least. While some say the current sales volumes belie a market waiting for Pakistan to stabilise, others believe the question of selling cars as witnessed in the initial boom is unlikely.

For them, much of the pressure created to grow the automobile industry was exaggerated and led to a state of expansion which did not reflect realistic market volumes, and hence marked the coming of the current shift, from boom to bust.

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