Honda’s big gamble

With the Honda Civic tipping over the Rs 6 million mark, what does the auto sector’s landscape look like in the immediate future?

By Abdullah Niazi

Five million rupees. That is nearly $30,000. It is more than what the average Pakistani family makes in terms of income over the course of a decade. It is also the price of the cheapest variant of the newly released 11th generation Honda Civic. The new Civic will hit the showrooms this March and the prices announced for different variants of the car range between Rs 5-6.1 million. This will make it the most expensive sedan in its category in the country, and will also mean that Honda’s mid-range sedan will be in the same price range as the Hyundai Sonata - which is Hyundai’s top-of-the-line luxury sedan. The implications of this are far reaching. Some models of the new Honda Civic will be more expensive than the recently launched and wildly popular KIA Sportage, which belongs to the cross-over SUV segment - a class above the sedan segment and supposed to be more expensive too.

For a very long time in Pakistan, the automobile industry has been dominated by the ‘Big Three’ car manufacturers - Toyota, Honda, and Suzuki. These Japanese automakers have been competing with each other in similar car categories. Suzuki would focus on hatchbacks and Honda and Toyota would duke it out over the sedan segment of cars. As a result, Pakistan’s automobile industry grew stunted and kept offering the same few car models in around the same price range.

Over the past few years, with the introduction of new car companies like KIA, MG, Changhan, and Hyundai, the car market in Pakistan has undergone a diversification. We are finally now at a stage where there are midline sedans that are as expensive if not more expensive than crossover SUVs and sedans that are in the same price range as hatchbacks.

How we have gotten here is a long, complicated story and the future is anyone’s to take. What we can say for sure is that as the competition continues to heat up and car prices continue to soar, it will be interesting to see how the older players deal with competition that they have not had much practice with in the past.

The car market as it is

Currently, Pakistan has more options for cars than it has had at any time in its history before this, in the sedan segment it was restricted to the Honda City in the cheaper sedan option with

the Toyota Corolla’s XLI and GLI variants competing with it. On the higher end of the spectrum, the Honda Civic competed with the Corolla’s Altis and Grande variants.

In recent times, the KIA Sportage has become a major competitor for the Civic and Corolla, providing a crossover SUV in the same price range as the sedans. A basic model of the Toyota Corolla with a 1300cc engine used to cost around Rs 2.7 million, and a fully loaded Toyota Corolla Grande with an 1800cc engine went for around Rs 3.6 million. Similarly, the Honda City in its top most variant was priced around Rs 2.4 million at this time and the Honda Civic with its top most variant cost around Rs 4 million. If you wanted to buy an SUV, you either had to get a Toyota Fortuner for around Rs 7 million or a Hyundai Tucson for around the same price. These were the prices around 2018-19, and around this time, the import of Japanese refurbished cars was down.

In 2019, KIA Lucky Motors launched the KIA Sportage for around Rs 4.5 million. Most people loved the design and KIA provided a quality SUV in Rs 4.5 million. Before the KIA Sportage, SUVs were being sold in the Rs 7-8 million range even by new entrants like Hyundai. The KIA Sportage suddenly meant that people buying the top most variant of the Toyota Corolla or the Honda Civic could now simply add another Rs 500,000 and enjoy the comforts and the sex-appeal of an SUV. And if a person can come up with Rs 4 million to buy a car, it is more than likely that they will be able to muster up another Rs 500,000 from somewhere or the other. Especially in a country like Pakistan, where SUVs and Land Cruisers are considered the height of wealth. The KIA Sportage could give you that feeling of being a Chaudhry Sahab without the extra Rs 3 million that it cost to upgrade from a Corolla or a Civic to a Fortuner or a Tucson.

In response, Toyata realised very quickly that KIA had succeeded by undercutting an entire category of car. To fix this had the idea to launch the Toyota Yaris. Essentially, they discontinued the cheaper variants of the Toyota Corolla with 1300cc engines, and launched a new car from scratch that was cheaper. Now, people could either buy a Toyota Corolla in the Rs 3.5 – 4 million range, or a Toyota Yaris in the Rs 2.5 – 3 million range. Essentially, Toyota did to the sedan exactly what KIA did with the SUV. KIA offered an SUV at a comparable price to a sedan and people went crazy for it. Toyota offered a sedan at just a little over the price of a hatchback.

At the same time, the competition continued to rise in this department. The Chaghan Alsvin is now providing a sedan in the Rs 2.4 - 2.9 million range. At the same time, the Hyundai Elantra is providing a 2000cc engine car in the Rs 3.5-4.3 million range. At the same time, they are also offering a luxury sedan, the Sonata, in the Rs 6.5-6-8 million range. This will directly be in the same price range as the new Honda Civic. Think of it this way. The Hyundai Sonata is Hyundai’s luxury sedan. Honda’s luxury sedan is the Honda Accord. Meanwhile, the Civic is the direct competitor to the Elantra in the compact sedan category. However, the Accord is over Rs 10 million compared to the Rs 7 million Sonata - which is the same price as a Honda Civic.

The Honda Civic is now also close to the same price as the Hyundai Tucson and the Toyota Fortuner, although both of those cars will most likely increase their prices in the near future. All of this means that Honda has poised itself as the most expensive car company in Pakistan. On the surface, since Hyundai and Toyota are the same in terms of brand equity, it seems to be a bad business decision. Why would consumers not gravitate towards the cheaper options in a higher category of car? However, it might just work because of certain kinks in the Pakistani automobile industry that have resulted in cars becoming fixed assets instead of depreciating assets. How did the car industry get to this point? It is necessary to understand the history of car manufacturing in Pakistan, and the particular economic conditions that have made the industry develop in the way that it has.

How we got here - an industry history

The Honda Civic occupies a very special place in Pakistan’s auto-history. One of the first locally available and assembled sedans in the country, the Civic hit Pakistan in 1995 and for the next two decades competed exclusively with the Toyota Corolla. While the Corolla has remained the most sold sedan in the country, the Civic has long occupied the position of being the slightly more expensive darling of petrol-heads.

It is, however, strange that up until now it has mostly only copped competition from one other car. That is because Pakistan’s automobile industry has developed rather unnaturally over the years. Our story begins in the early 1980s. Up until then, cars were mostly only for the uber elite, and the auto industry in Pakistan had flip flopped between privatisation and nationalisation. A quick perusal of Wikipedia will give you the details of what cars were being produced before the 90s, but the critical moment that spelled the fate of car buyers in Pakistan was the arrival of Suzuki in 1982.

Pak Suzuki Motors was launched as a joint venture between the government of Pakistan and Suzuki Motors Japan, formalizing the arrangement by which Awami Auto Ltd. had produced the Suzuki SS80 from 1982. Suzuki originally owned 25% of the stock, but when the Pakistani automobile market began to deregulate around 1990, Suzuki Japan began an aggressive campaign to gain control of the company and have since increased their holding up to 75% of the company.

And why would they not want to do that? Pakistan was an open market with no major player already there and Suzuki saw the opportunity to thrive. In 1989, they launched the now iconic (and now discontinued) Suzuki Mehran. Other models like the Suzuki FX followed and even their vans like the Suzuki Bolan became wildly popular.

Suzuki was the first real car manufacturer that Pakistanis got an opportunity to buy from, and they were offering small, affordable, hatchback models that were reliable and provided comfort and safety according to the standards of that era. Sensing this success, other Japanese companies knew that Pakistan was an open market and decided to step in. These companies were Toyota (which also sells under the brand name Daihatsu) and Honda.

At this point Suzuki had already taken first-mover advantage and would fight tooth and nail to keep their monopoly, which is why Honda and Toyota decided to target a completely different market – sedans.

In a joint venture with Toyota Japan, Indus Motors Pakistan rebranded itself as Toyota Indus in 1990 and started to assemble. The Toyota Corolla started being manufactured in Pakistan in 1993. Honda Atlas was based in Lahore, and under the auspices of Yusuf Sherazi and the Atlas Group, launched in 1992. By 1994, they were giving Toyota Indus a run for their money with the production of the Honda Civic and Honda City in direct competition with the Toyota Corolla.

Suddenly, the Pakistani market had three new entrants and what seemed to be a world of choice. Initially, Suzuki did try to fight back by trying to produce their own sedans from the Suzuki Khyber to the Margalla and the very modern looking Baleno. However, all of their attempts to make sedans work, even up until recent years with the Suzuki Liana and Ciaz, have failed.

The Big Three from this point on maintained a tactful and unspoken agreement. Suzuki kept its monopoly on the hatchback category and Honda and Toyota slugged it out for the sedans. If any new entrants came onto the market (and many tried), they were quickly sullied and sent packing. In this way, for nearly three decades there were essentially only six options for locally assembled ‘family cars’ in Pakistan. Suzuki at any given time was assembling three to four hatchbacks, with mainstays including the Mehran, the Alto, and the Cultus. Meanwhile Honda produced its cheaper sedan the Honda City, and it’s more expensive competitor to the Toyota Corolla the Honda Civic. Toyota focused on making just the one car, albeit in different variants with different engine sizes.

The lopsided automobile market

Very quickly this became the status quo and for two to three decades things remained the same. A number of companies tried to launch in Pakistan. The Chinese company FAW brought in its hatchbacks along with heavy loaders around 2014. All of the attempts failed. Why? One simple reason – resale value.

There is a brilliant column in this week’s Profit by Ammar H Khan titled “The lopsided market structure of the automobile industry.” Without picking out in particular cars, Khan explains how the car market in Pakistan is topsy turvy because cars are seen as a fixed asset and not an asset that depreciates in value over time. In simpler terms, this is what is known as the dreaded ‘resale’ concept in the Pakistani car market.

Successively bad car policies and the unwillingness of these three companies to manufacture completely in Pakistan meant that car prices remained high. Even though the cars were being assembled in Pakistan, they were being imported here part by part. This meant that no matter what car prices would also rise with the price of the dollar. So very quickly, cars in Pakistan were no longer just a mode of transport, they also became an investment and a crutch against the devaluation of the rupee since most parts of the cars were imported. So, for example, if a person bought a Suzuki Alto in 2007 for Rs 500,000, a likely price they would sell the car for in 2012 would be somewhere between 600,000 – 700,000. Because of this phenomenon, one of the major factors when buying a car became resale value. And because the Big Three had become mainstays, anytime a new manufacturer came around, consumers would be worried that if they failed and packed up, then the resale value of their cars would plummet.

In this way, resale value became perhaps one of the most important factors in choosing what car to buy in Pakistan. However, around 2015-16, the government changed some auto policy in terms of providing space to auto manufacturers in SEZs and giving them tax breaks. As a result, new companies tried to make an entry again (this has been KIA’s third attempt at entering the Pakistani market) and this time it worked.

Will Honda’s gamble work?

In terms of market size, Toyota is secure, KIA is growing, MG is about to introduce a sedan, and Changan is targeting a very specific segment of consumers in the lower-income background. In all of this, it was Honda that was taking the hits. Since KIA cut into their sale of the Honda Civic, and the Toyota Yaris meant another budget sedan was available causing the sales of Honda City to be affected. That is why Honda Civics and Honda Citys combined sold a total of 37,195 units in the past two years. In comparison, the Toyota Corolla alone, despite being challenged by the KIA Sportage, sold 38,514 units in the same two year period. The KIA Sportage meanwhile sold 25,000 units in two years.Toyota had an incredible run with the Yaris, with 29,622 units sold in 14 months. If we take an average of the number of Yaris sold in 14 months, we get 2115 cars. If we then multiply it with 24 months, that makes it 50,780 cars in total. Meaning, had Yaris been produced and sold all 24 months, it would be the most sold car. At this rate, the number of Toyota Yaris sold are double the number of KIA Sportages – something that is to be expected since the Yaris is Rs 2 million cheaper and cutting into both the Suzuki Cultus market and the Honda City market.

Essentially, at the end of the day, both the Honda Civic and City combined did not manage to outsell the Toyota Corolla while the Toyota Yaris broke car buying records. The Sportage also clearly made more of a dent in Honda’s market than it did Toyota’s.

Meanwhile, there has also been competition from Hyundai, which has introduced two new sedans, the Elantra and the Sonata, that have been mentioned before. From July 2021 up until December 2021, Hyundai sold 1522 units of the Elantra and 1240 units of the Sonata. At the same time, Honda sold around 17,000 units of the Honda City and Civic combined. While that is significantly ahead, it is still worth noting that the Elantra and Sonata have only just been launched and are already pulling a significant customer base which could be challenged now that the prices of the Civic and City are going up with new generations of both being introduced..

Honda’s bet here is once again on resale value. They are under the impression that if customers see Honda products as expensive they will consider the resale value of these products as expensive in the future as well. However, what Honda would do well to remember is that now that there are more than three companies on the market, the status of cars as fixed assets may finally begin to eb and people might get used to cars becoming a depreciating asset. However, if this does not happen and people once again flock to the Honda Civic, their gamble might just pay off in a big way. n