ENGINEERING DEVELOPMENT BOARD

(Desk study of)

PRICE INCREASE ANALYSIS OF AUTOMOTIVE SECTOR

For

MINISTRY OF INDUSTRIES AND PRODUCTION

(2019 – 2021)

By

BAKER TILLY MEHMOOD IDREES QAMAR.

CHARTERED ACCOUNTANTS

1
TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................................................................................................................... 4

OVERVIEW OF ASSIGNMENT AND NEED ANALYSIS ................................................................................................ 4

METHODOLOGY ..................................................................................................................................................... 5

ABOUT CLIENT AND CONSULTANT ......................................................................................................................... 5

ASSIGNMENT FLOW AND METHODOLOGY ADOPTED ............................................................................................ 6

FINANCIAL ANALYSIS BASIS AND OUTCOME .......................................................................................................... 7

COMPARATIVE PROFITABILITY ANALYSIS OF THE AUTOMOBILE COMPANIES .........................................................16

DISCUSSION, OBSERVATION AND RESULTS IN DETAIL.......................................................................................... 19

POSSIBLE CAUSES OF RISING AUTO PRICES .......................................................................................................... 19

IMPEDING ELEMENTS: ......................................................................................................................................... 23

OVERALL CONCLUSION ............................................................................................................................................24

RECOMMENDATIONS ..............................................................................................................................................25

2
KW/IA/0921
April 05, 2022

Chief Executive
Engineering Development Board (EDB)
EDB Complex Building, 5-A, Constitution
Islamabad
Islamabad, Pakistan

RE: DESK STUDY OF PRICE INCREASE ANALYSIS OF AUTOMOTIVE SECTOR

FOR THE FINANCIAL YEARS 2019 TO 2021

We have been assigned to study price increase analysis in car manufacturing/assembly sector for
the year as cited above; we have recently completed our field work for the above period. In
planning and performing our analysis techniques for companies in car manufacturing sector, we
considered their financial figures as baseline for our assessment.

Sector based analysis is one of the key expertize of the firm and we had been doing such works for
various other industries and production houses. Our procedure applied specially for this report
were around published and available financial statement of key players in this sector with
corroborative non-financial and extra financial information a readily available for considering and
extracting any useful understanding based on our analysis results.

This assignment was restricted to a limited study by using available information from sources as
available to public and no specific and sector based information were either gathered or used,
information in public domain as found available from internet sources were only analyzed and
compared to reach at an understanding, accordingly this assignment could only be an indicative
study and not a comprehensive or in depth assessment of contemporary situation.

This report is intended solely for the information and use of management and others within EDB
and MoIP.

Sincerely,

BAKER TILLY MEHMOOD IDREES QAMAR

Chartered Accountants

3
EXECUTIVE SUMMARY

This report outlines EDB’s desire to hire services of a financial and governance consultant who
may provide a desk review based automotive, especially passenger vehicle, industry sectoral
analysis for impact in selling prices of such vehicles.

Following automobile companies were taken for this analysis as financial data for these companies
was available readily. Results of Pakistan operations were only considered.
1. Toyota
2. Honda
3. Suzuki
Available data from public domain is used, which was extracted from website of selected
companies and mainly comprised of Financial Statements as audited and placed.

OVERVIEW OF ASSIGNMENT AND NEED ANALYSIS

 Desk review of automotive sector in Pakistan, especially passenger car, SUV and LCV
segments
 Conduct industry sectoral analysis for determination impact of various input factors on
end-user (selling) prices of such vehicles.
 Study trend of input factors (e.g. Exchange Rate, Raw Materials, Freight etc.) change during
the past one year.
 Analyze last one year price increase, whether appropriate or exorbitant.
 Evaluate last three years financial statements of public listed companies in this sector to
determine changes in performance parameters like profitability etc.
 Analyze last three years data available with Government entities like FBR, SBP etc to draw
meaningful conclusions.
 Analysis to be based on:
a) Information published by listed companies
b) Industry associations, PAMA and PAAPAM
c) Federal Govt entities, FBR, SBP, EDB
d) International (publically available) sources related to prices of Raw Materials, Freight ,
etc.
e) Government policies for the sector:
f) ADP 2016-21
g) AIDEP 2021-26

4
METHODOLOGY

The study of Price Increase Analysis of Automotive Sector was performed using the following
approach:

Analyze of different aspects of car manufacturing, assembly, import, and selling with a view to
identify factors that may have resulted in price increase, besides increase in rupee dollar parity.
The consultant may require various published and other information from relevant information
holders. Ministry will assist to provide needed information.

. Furthermore current and previous policy related to the sector, comprising ADP 2016-21 and
AIDEP 2022-26 policy will be considered to assess increase in prices.

ABOUT CLIENT AND CONSULTANT

The information in this document and any oral presentations made by Baker Tilly Mehmood Idrees
Qamar Chartered Accountant (BAKER TILLY) contains trade secrets and confidential and
proprietary information of BAKER TILLY, disclosure whereof might provide substantial benefit to
competitors.
As a result, this proposal document should not be disclosed, used or duplicated – in whole or in
part – for any purpose other than evaluating BAKER TILLY for the purposes of awarding an
assignment. If the assignment is awarded to BAKER TILLY, your right to duplicate, use or disclose
the information in this document will be to the extent authorized in the resulting formal
agreement between you and BAKER TILLY
In case the assignment is not awarded to BAKER TILLY, this document and any duplicate copy or
soft copy thereof should be returned to BAKER TILLY, or destroyed.

Baker Tilly Mehmood Idrees Qamar Expansion phase continued and BTMIQ Provincial office
Peshawar was established in May 2012, the city of flowers and Capital of Khyber Pakhtunkhwa,
aim to provide the highest quality of audit, assurance, tax and other advisory services. Since 2012
we are engaged in providing services of assurance to Manufacturing Concerns, Construction,
NGOs, and Public Sector Organizations.

Engineering Development Board was established in 1995. The primary mandate assigned to the
board is policy formulation and implementation for facilitating and encouraging development &
growth of the Engineering Industry of the country. Later it was decided that EDB shall function as
an apex policy and decision making autonomous body for all aspects concerning the Engineering
Industry as per its terms of reference. EDB implemented indigenization programs, carried out the
tariff rationalizations, and other sectoral/business development activities for different engineering
sectors.

5
ASSIGNMENT FLOW AND METHODOLOGY ADOPTED

As Consultants, we would:

Analyze of different aspects of car manufacturing, assembly, import, and selling with a view to
identify factors that may have resulted in price increase, besides increase in rupee dollar parity.
The consultant may require various published and other information from relevant information
holders. Ministry will assist to provide needed information
. Furthermore current and previous policy related to the sector, comprising ADP 2016-21 and
AIDEP 2022-26 policy will be considered to assess increase in prices.

Approach and Methodology:

• Collection of available data. Financial Statement and others

• List further required data/information, FBR related SROs
• Assign to desk review Team(s)
• Assemble draft report
• Review by internal and external parties
• Present draft report to client
• Provide report after consultation and feedback

6
FINANCIAL ANALYSIS BASIS AND OUTCOME

Profitability Ratios

2021 2020 2019

% % %

Gross Profit ratio 5.6 7.4 7.7

Operating Profit ratio 4.3 4.1 5.9

Net Profit ratio 2.7 1.2 4

Return on Equity ratio 8.9 3.7 22.2

Comparison of gross/net profit

2021 2020 2019

(Amount in “000”)
Gross Profit 3,776,000 4,091,000 7,309,000
Operating Profit 2,897,000 2,275,000 5,605,000
Net Profit 1,793,000 682,000 3,851,000

7
 DIRECT COST AND OPERATIONAL EXPENSE ANALYSIS (HONDA)

2021 2020 2019

Amount in EXPENSE Amount in EXPENSE Amount in EXPENSE
Rs."000" % Rs."000" % Rs."000" %
COST OF SALES 63,586,363 0.98 50,955,042 0.97 87,824,215 0.98
OPERATING EXPENSES 1,560,562 0.02 1,406,658 0.03 1,731,827 0.02
TOTAL 65,146,925 1.00 52,361,700 1.00 89,556,042 1.00

DETAILED EXPENSE ANALYSIS 86 88 90

Cost of Sales 2021 % to Cost of 2020 % to Cost of 2019 % to Cost of
Sales Sales Sales

Raw material consumed 56,011,474 88.09 46,185,802 90.64 80,771,728 91.97

Stores and spares consumed 108,616 0.17 107,800 0.21 222,743 0.25
Salaries, wages and benefits 1,349,949 2.12 1,211,920 2.38 1,439,440 1.64
Fuel and power 195,605 0.31 172,137 0.34 222,174 0.25
Insurance 139,653 0.22 112,486 0.22 71,436 0.08
Travelling and vehicle running 129,055 0.20 187,343 0.37 241,089 0.27
Freight and handling 126,936 0.20 133,351 0.26 260,463 0.30
Repairs and maintenance 36,671 0.06 46,176 0.09 133,666 0.15
Technical assistance 11,542 0.02 32,429 0.06 36,593 0.04
Depreciation on property, plant 595,171 0.94 713,429 1.40 775,695 0.88
and equipment
Amortization of intangible 98,434 0.15 122,723 0.24 80,621 0.09
assets
Royalty 1,310,029 2.06 1,057,479 2.08 1,923,393 2.19
Canteen subsidy 39,562 0.06 47,789 0.09 85,306 0.10
Cost of providing free goods and 140,674 0.22 128,037 0.25 - -
services
Provision for net realizable 72,367 0.11 - - - -
value
Other expenses 42,149 0.07 61,038 0.12 17,332 0.02
60,407,887 50,319,939 86,281,679
Opening / Closing stocks net off 3,178,476 5.00 635,103 1.25 1,542,536 1.76
Total Cost of Sales 63,586,363 100 50,955,042 100 87,824,215 100

Operating Expenses 2021 Oper Exp % 2020 Oper Exp % 2019 Oper Exp %

ADMINISTRATIVE EXPENSES
Salaries, wages and benefits 445,417 28.54 404,104 28.73 437,026 25.23
Fuel and power 12,276 0.79 5,385 0.38 5,940 0.34
Insurance 17,114 1.10 14,553 1.03 11,192 0.65
Travelling and vehicle running 49,492 3.17 62,505 4.44 55,536 3.21
Repairs and maintenance 65,542 4.20 38,417 2.73 58,776 3.39
Printing and stationery 9,179 0.59 10,425 0.74 12,329 0.71
Communications 41,939 2.69 39,613 2.82 37,288 2.15
Postage 913 0.06 734 0.05 1,704 0.10
Auditors’ remuneration 9,866 0.63 12,009 0.85 10,865 0.63
Legal and professional charges 18,419 1.18 20,284 1.44 23,855 1.38
Depreciation on property, plant 75,703 4.85 72,407 5.15 68,281 3.94
and equipment

8
 Amortization of intangible 4,393 0.28 13,794 0.98 13,008 0.75
assets
Fees and subscriptions 5,411 0.35 5,079 0.36 3,286 0.19
Canteen subsidy 13,866 0.89 9,915 0.70 12,933 0.75
Security expenses 49 0.00 295 0.02 697 0.04
Training expenses 2,118 0.14 16,460 1.17 29,701 1.72
Others 51,891 3.33 12,778 0.91 17,623 1.02
823,588 738,757 800,040
DISTRIBUTION EXPENSES -
-
Salaries, wages and benefits 265,668 17.02 233,877 16.63 237,347 13.71
Fuel and power 6,844 0.44 6,551 0.47 6,471 0.37
Insurance 17,985 1.15 16,730 1.19 14,402 0.83
Travelling and vehicle running 20,153 1.29 42,434 3.02 39,984 2.31
Freight and handling 17,745 1.14 31,080 2.21 33,295 1.92
Repairs and maintenance 5,881 0.38 14,031 1.00 32,454 1.87
Printing and stationery 8,174 0.52 8,403 0.60 17,103 0.99
Warranty costs - net of claims 66,507 4.26 (99,317) (7.06) 115,344 6.66
Advertising and sales promotion 178,293 11.42 294,725 20.95 304,325 17.57
Depreciation on property, plant 32,799 2.10 40,708 2.89 37,643 2.17
and equipment
Training expenses 3,262 0.21 175 0.01 6,090 0.35
Canteen subsidy 7,374 0.47 9,264 0.66 10,455 0.60
Free service claims 5,200 0.33 8,091 0.58 12,493 0.72
Rent, rates and taxes 25,525 1.64 23,368 1.66 21,007 1.21
Fees and subscriptions 71,191 4.56 29,696 2.11 33,199 1.92
Others 4,373 0.28 8,085 0.57 10,175 0.59
736,974 667,901 931,787

Total Operating Expenses 1,560,562 100 1,406,658 100 1,731,827 100

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 INDUS MOTOR COMPANY-TOYOTA

Profitability Ratios

2021 2020 2019

% % %
Profit After Tax 12.8 5.1 13.7

Profit before tax 18.2 7.3 19.0

Gross Profit Ratio 9.30 8.65 12.15
Net Profit Ratio 7.16 5.90 8.68
Return on equity 26.61 12.34 34.25
Average fixed assets 11.06 5.66 14.90
turnover (Times)
Operating Profit Ratio 10.23 8.55 12.05

Comparison of Other Factors:

2021 2020 2019

Gross Revenue “000” 226,619,870 108,193,994 191,383,617

Net Revenue (billions) 179.2 86.2 158.0

(Income tax, sales tax,
excise duty, customs 69,183,249 32,295,165 53,264,406
duty, WWF, and WPPF)

OPERATIONAL EXPENSE ANALYSIS

2021 EXPENSE 2020 EXPENSE 2019 EXPENSE

% % %
COST OF SALES
162,508,017 0.98 78,716,157 0.96 138,594,008 0.98
OPERATING EXPENSES
3,160,093 0.02 3,050,701 0.04 3,028,658 0.02

165,668,110 1.00 81,766,858 1.00 141,622,666 1.00

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 DETAILED EXPENSE ANALYSIS (TOYOTA)

Cost of Sales 2021 % to Cost 2020 % to Cost of 2019 % to Cost

of Sales Sales of Sales

Raw Material Cost 151,657,191 93.32 66,049,227 83.91 120,953,815 87.27

Stores and spares consumed 1,925,873 1.19 953,154 1.21 1,886,361 1.36
Salaries, wages and other
1,962,119 1.21 1,585,105 2.01 1,796,938 1.30
benefits
Rent, rates and taxes 6,086 0.00 10,929 0.01 16,218 0.01
Repairs and maintenance 306,310 0.19 328,279 0.42 443,235 0.32
Depreciation 2,961,259 1.82 2,687,413 3.41 1,986,409 1.43
Legal and professional 1,334 0.00 421 0.00 2,540 0.00
Travelling 12,314 0.01 19,592 0.02 30,048 0.02
Transportation 8,538 0.01 5,853 0.01 9,893 0.01
Transportation 60,416 0.04 45,472 0.06 42,558 0.03
Vehicle running 20,013 0.01 18,555 0.02 21,381 0.02
Communication 4,589 0.00 3,928 0.00 4,082 0.00
Printing, stationery and office
2,956 0.00 3,112 0.00 3,550 0.00
supplies
Subscription 3,560 0.00 3,016 0.00 2,274 0.00
Fuel and power 565,338 0.35 407,865 0.52 565,843 0.41
Running royalty 2,667,789 1.64 1,485,663 1.89 3,343,967 2.41
Supervisor fee 547 0.00 95,328 0.12 155,344 0.11
Technical fee 7,574 0.00 8,350 0.01 8,964 0.01
Staff catering, transport and
594,969 0.37 304,909 0.39 563,828 0.41
uniforms
Provision for slow moving
7,207 0.00 36,564 0.05 (21,081) (0.02)
stock-in-trade
Provision for slow moving
37,220 0.02 277,678 0.35 70,634 0.05
stores and spares
Others 19,355 0.01 35,556 0.05 44,881 0.03
162,832,557 74,365,969 131,931,682
Opening / Closing stocks net off (324,540) (0.20) 4,350,188 5.52642 6,662,326 4.81
Total Cost of Sales 162,508,017 100.00 78,716,157 100.00 138,594,008 100.00

Operating Expenses
Operating Operating Operating
2021 2020 2019
Expense % Expense % Expense %
ADMINISTRATIVE EXPENSES
Salaries, wages and other
640,351 20.26 531,842 17.43 525,561 17.35
benefits
Rent, rates and taxes 4,152 0.13 3,856 0.13 3,615 0.12
Insurance 52,110 1.65 49,851 1.63 41,213 1.36
Repairs and maintenance 114,132 3.61 106,215 3.48 78,986 2.61
Depreciation 75,699 2.40 73,799 2.42 64,787 2.14
Amortization 37,315 1.18 35,557 1.17 30,018 0.99
Travelling 16,922 0.54 50,153 1.64 61,265 2.02

11
 Legal and professional 246,871 7.81 260,264 8.53 196,160 6.48
Director's fee 3,250 0.10 2,875 0.09 1,500 0.05
Vehicle running 26,277 0.83 20,177 0.66 20,673 0.68
Communication 20,735 0.66 19,354 0.63 21,883 0.72
Printing, stationery and office
2,983 0.09 3,782 0.12 4,595 0.15
supplies
Staff training 107,819 3.41 133,503 4.38 207,883 6.86
Staff transport and canteen 64,447 2.04 35,527 1.16 43,425 1.43
Security 34,297 1.09 35,237 1.16 43,739 1.44
Subscription 15,026 0.48 6,919 0.23 34,920 1.15
Utilities 428 0.01 2,230 0.07 421 0.01
Others 2,074 0.07 13,958 0.46 9,426 0.31
1,464,888 1,385,099 1,390,070
DISTRIBUTION EXPENSES
Salaries, wages and other
308,234 9.75 295,736 9.69 267,436 8.83
benefits
Rent, rates and taxes 4,836 0.15 4,736 0.16 4,305 0.14
Repairs and maintenance 4,060 0.13 3,795 0.12 4,953 0.16
Depreciation 48,855 1.55 42,413 1.39 39,842 1.32
Advertising and sales
458,822 14.52 655,101 21.47 478,948 15.81
promotion
Travelling 11,092 0.35 19,578 0.64 31,852 1.05
Vehicle running 22,913 0.73 19,511 0.64 17,675 0.58
Communication 3,114 0.10 2,113 0.07 2,432 0.08
Printing, stationery and office
7,790 0.25 4,813 0.16 7,542 0.25
supplies
Staff training 7,452 0.24 27,701 0.91 14,639 0.48
Staff transport and canteen 32,177 1.02 22,943 0.75 28,119 0.93
Subscription 1,432 0.05 251 0.01 193 0.01
Warranty claims 344,344 10.90 157,714 5.17 297,136 9.81
Pre-delivery inspection and
67,987 2.15 15,377 0.50 67,208 2.22
service charges
Development expenditure 12,420 0.39 46,497 1.52 23,169 0.76
Utilities 363 0.01 224 0.01 61 0.00
Transportation 83,685 2.65 74,175 2.43 69,564 2.30
Running royalty 21,892 0.69 19,148 0.63 30,239 1.00
Late delivery charges 176,822 5.60 56,550 1.85 978 0.03
Others 573 0.02 227 0.01 17,320 0.57
1,618,863 1,468,603 1,403,611
OTHER OPERATING EXPENSES -
Auditors’ remuneration 2,981 0.09 6,757 0.22 4,985 0.16
Donations 74,056 2.34 189,983 6.23 229,992 7.59
(Reversal) / Provision for
(695) (0.02) 259 0.01 0 -
doubtful debts
76,342 196,999 234,977
Total Operating Expenses 3,160,093 100.00 3,050,701 100.00 3,028,658 100.00

12
 SUZUKI MOTORS PAKISTAN LIMITED

Profitability Ratios

2021 2020 2019

% % %

Gross Profit Ratio 5.1 4.7 1.7

Operating Profit Ratio 2.8 -2.5 -4.2

Net Profit Ratio 1.7 -1.8 -2.5

Comparison of gross/net profit

2021 2020 2019

(Amount in “000”)

Gross Profit 8,171,000 3,599,000 1,985,000

Operating Profit 2,677,000 135,000 (3,083,000)
Net Profit/(Loss) (before 3,795,000 (1,888,000) (4,952,000)
taxation)

DIRECT COST AND OPERATIONAL EXPENSE ANALYSIS (SUZUKI)

2021 2020 2019

Amount in EXPENSE Amount in EXPENSE Amount in EXPENSE
Rs."000" % Rs."000" % Rs."000" %
COST OF SALES 151,911,517 0.97 73,120,914 0.96 114,563,486 0.96
OPERATING EXPENSES 5,424,069 0.03 3,430,616 0.04 5,089,914 0.04
TOTAL 157,335,586 1.00 76,551,530 1.00 119,653,400 1.00
DETAILED EXPENSE ANALYSIS 87 70 85
Cost of Sales % to % to % to
2021 Cost of 2020 Cost of 2019 Cost of
Sales Sales Sales

Raw materials and components

137,465,318 90.49 53,233,321 72.80 102,070,300 89.09
consumed

13
 Stores and spares consumed 666,772 0.44 35,379 0.05 61,630 0.05
Provision for slow moving and
obsolete stores, spares and loose 33,036 0.02 45,807 0.06 24,283 0.02
tools
Utilities 758,664 0.50 425,481 0.58 425,306 0.37
Vehicle running expenses 34,058 0.02 23,190 0.03 29,126 0.03
Salaries, wages and other benefits 2,095,499 1.38 1,348,977 1.84 2,072,281 1.81
Outsourced job contractor charges 862,696 0.57 497,190 0.68 907,628 0.79
Expenses relating to short-term leases 13,963 0.01 53,649 0.07 32,541 0.03
Travelling 20,534 0.01 20,838 0.03 85,278 0.07
Training 21,262 0.01 4,627 0.01 10,157 0.01
Insurance 30,125 0.02 44,625 0.06 20,796 0.02
Repairs and maintenance 596,549 0.39 335,090 0.46 639,582 0.56
Royalty 2,742,450 1.81 1,284,465 1.76 1,680,777 1.47
Technical fee 297,748 0.20 132,435 0.18 345,018 0.30
Travelling expenses of supervisors - - 125 0.00 9,059 0.01
Depreciation 3,096,047 2.04 3,219,941 4.40 2,625,616 2.29
Amortization 114,995 0.08 130,913 0.18 146,646 0.13
Conveyance and transportation 320,875 0.21 171,263 0.23 300,145 0.26
Communication 2,713 0.00 1,946 0.00 4,642 0.00
Hired security guards services 15,912 0.01 20,481 0.03 22,563 0.02
Local development costs 94,997 0.06 51,770 0.07 69,652 0.06
Printing and stationery 754 0.00 1,934 0.00 533 0.00
Computer software license fee and ERP
2,799 0.00 2,451 0.00 5,787 0.01
maintenance charges
Legal & Professional charges - - - - 500 0.00
Others 2,973 0.00 4,531 0.01 18,282 0.02
149,290,739 61,090,429 111,608,128
Opening / Closing stocks net off 2,620,778 1.73 12,030,485 16.45 2,955,358 2.58
Total Cost of Sales 151,911,517 100 73,120,914 100 114,563,486 100
Operating Expenses Oper Exp Oper Exp Oper Exp
2021 2020 2019
% % %

ADMINISTRATIVE EXPENSES
Salaries, wages and other benefits 1,227,319 22.63 818,638 23.86 1,266,786 24.89
Outsourced job contractor charges 170,885 3.15 135,695 3.96 226,856 4.46
Travelling 39,273 0.72 45,864 1.34 140,756 2.77
Training 10,107 0.19 7,726 0.23 17,955 0.35
Hired security guards services 53,780 0.99 42,373 1.24 52,351 1.03
Depreciation - Right of use of asset 46,090 0.85 55,283 1.61 57,119 1.12
Expenses relating to short-term leases 63,557 1.17 83,569 2.44 57,651 1.13
Utilities 62,576 1.15 31,267 0.91 35,794 0.70
Vehicle running expenses 74,028 1.36 60,582 1.77 81,078 1.59
Insurance 17,401 0.32 15,931 0.46 30,055 0.59
Repairs and maintenance 79,497 1.47 56,639 1.65 83,310 1.64
Depreciation 168,524 3.11 183,721 5.36 180,963 3.56
Amortization 25,351 0.47 27,242 0.79 31,530 0.62
Auditors’ remuneration 5,191 0.10 4,239 0.12 3,742 0.07
Legal and professional charges 24,636 0.45 15,522 0.45 38,179 0.75
Conveyance and transportation 126,200 2.33 69,748 2.03 118,481 2.33
Entertainment 189 0.00 123 0.00 441 0.01
Printing and stationery 61,964 1.14 43,187 1.26 42,870 0.84

14
 Communication 27,722 0.51 19,250 0.56 26,598 0.52
Directors’ fees 5,000 0.09 4,160 0.12 8,600 0.17
Trade debts written-off 192 0.00 - - 204 0.00
Computer software license fee and ERP
171,166 3.16 41,625 1.21 16,131 0.32
maintenance charges
Corporate Social Responsibility (Donations) 11,182 0.21 12,559 0.37 8,952 0.18
Others 8,971 0.17 15,882 0.46 24,261 0.48
2,480,801 1,790,825 2,550,663
DISTRIBUTION AND MARKETING EXPENSES
Transportation and handling charges 1,961,344 36.16 927,008 27.02 1,736,317 34.11
Advertising and sales promotion 505,399 9.32 616,504 17.97 734,925 14.44
Warranty claims 395,570 7.29 48,911 1.43 3,381 0.07
Royalty on trading spare parts 80,955 1.49 47,368 1.38 64,628 1.27
2,943,268 1,639,791 2,539,251
Total Operating Expenses 5,424,069 100.00 3,430,616 100.00 5,089,914 100.00

Reasons of Loss 2019

1. Sales volume during the year 2019 for cars and light commercial vehicles declined by 19%
from 140,313 units to 113,270 units.
2. Net sales revenues decreased by Rs 3,306 million from Rs 119,854 million to Rs 116,548
million.
3. Gross profit decreased in absolute terms by Rs 5,060 million from Rs. 7,045 million to Rs
1,985 million.
4. Massive devaluation of the Pak Rupee and multiple duty & tax increases levied from July
2019 budget resulted in increased imported material costs, consequently adversely
affecting the profit margins
5. Besideside the decline in gross profits, another factor for adverse profitability was the
increase in financial charges by Rs. 1,763 million in the current year from Rs. 185 million in
2018 to Rs. 1,948 million in 2019.

Reasons of Loss 2020

1. Sales volume during the year 2020 for cars and light commercial vehicles declined by 48%
from 113,270 units to 59,281 units.
2. Demand for lower segment vehicles was adversely impacted resulting in a decline in the
market share of the Company from 59% in the year 2019 to 48% in 2020.
3. The Company operated at 33% capacity utilization and achieved a production volume of
49,528 units of automobiles.
4. Company achieved a sales volume of 17,111 units as compared to the sales volume of
22,589 units in the corresponding period of last year.
5. Net sales revenues decreased by Rs 39,828 million from Rs 116,548 million to Rs 76,720
million. Sales revenue decreased by 34% in the current year over last year due to a decline
in sales volume.
6. Gross profit increased in absolute terms by Rs 1,317 million from Rs 1,985 million to Rs
3,302 million. The company passed on the impact of the increase in production cost in

15
 phases by gradually increasing the prices of its products, resulting in improved margins in
2020
7. Major reason for the loss incurred during the year was due to massive decline in sales
volume.

COMPARATIVE PROFITABILITY ANALYSIS OF THE AUTOMOBILE COMPANIES

PROFITABILITY RATIO (GROSS PROFIT)

TOYOTA HONDA
SUZUKI
12.15

9.3
8.65
7.7 7.4
5.6 5.1
4.69

1.7

2019 2020 2021

PROFITABILITY RATIO (NET PROFIT/LOSS

AFTER TAX %)
8
6
4
NPAT

2
0
-2
-4
2019 2020 2021
TOYOTA 0.01 0.01 7.16
HONDA 4.05 1.24 2.66
SUZUKI -2.51 -1.8 1.67

16
DIRECT COST AND OPERATIONAL EXPENSE ANALYSIS

YEAR TOYOTA HONDA SUZUKI

CGS% Admn% CGS% Admn% CGS% Admn%
2019 98 2 98 2 96 4
2020 96 4 97 3 97 3
2021 98 2 98 2 97 3
Direct cost and Operational expense analysis are detailed and exhibited in Analysis stated above
(Toyota), (Honda), and C (Suzuki). Data for doing these detailed cost analyses are obtained from
the financial statements that are publically published and available on the company’s website. The
crux of detailed cost analysis is as under;

1. Cost analysis displays similar cost behavior concerning the pattern and percentage of
expenses in these automobile market leaders in Pakistan.

2. Expenses are apportioned into two main categories i.e. Direct Expenses and Operational
Expenses.

A. Direct cost or expense means an expense that can be directly tied to production. Direct
cost is a variable cost which means it fluctuates according to the production levels.

B. Operating Expenses are incurred in the normal course of business that is not directly
related to the cost of a product but necessary for business operations. These expenses
are also called period costs e.g. Management and administrative expenses.

3. Direct expenses represent 98% of the total cost of the automobile in each company and
only 02% of the total expenses incurred or expend on operational/administrative/selling
expenses.

4. Raw material and components cost represents a significant amount of cost in all these
three companies. Raw material and components cost ranges from 85 to 90 percent of the
total cost (Direct + operational).

17
5. Based on cost analysis it can be assertively concluded that the raw material and
component cost is the only material cost of the automobile industry in Pakistan that
represents approximately 90% of direct expense apportioned to the cost of the
automobile.

Raw Material Rate Analysis (Hot Rolled Bars)

290
271

177
Rate/Kg

150

2019 2020 2021 2022

Years
Raw Material Per Kg (Hot Rolled Bars)

18
 International Freight Charges
6500

4500
Freight Charges

400

2019 2020 2021

Years

International Freight Charges

An increase in the price of the components or parts is the main reason for the high pricing of
vehicles in Pakistan. Automobiles are partly manufactured and totally assembled in Pakistan. An
increase in the prices of raw material, dollar appreciation against rupee and import related freight
forwarding expenses put a direct impact on the cost of this sector.

However, a detailed investigation is required to be conducted concerning the import value of the
components of these vehicles.

DISCUSSION, OBSERVATION AND RESULTS IN DETAIL

Possible Causes of Rising Auto Prices

Absence of Genuine Competition:

 The absence of genuine competition has let the local industry dictate the market in terms of
prices.
 The continuous price increases of local automobiles since 2019 have put new cars out of range
of middle and upper-middle-income groups.
 The four leading manufacturers i.e. Honda, Indus Motors, Lucky Motors, and Pak Suzuki
increased their prices multiple times in 2020-2022. It appears that they have adopted a
strategy of increasing profits on limited production instead of increasing volumes.
 In the downstream market, dealers of the manufacturers/assemblers act as mere agents and
have no real incentive to compete in the market.

19
 Limited Production Capacity:

 Production of cars in Pakistan takes place at a limited number of manufacturing plants.

Consumers often have to wait for months before receiving new cars

 Late delivery and high premiums on locally assembled cars remain the major cause of
increased prices and dissatisfaction among buyers.

Appreciation of foreign currencies (Dollar):

 A recent increase has been felt in the prices of major Auto companies in Pakistan as a
result of Dollar appreciation against various currencies, making imports of parts and
accessories expensive.

 The makers of Honda cars announced the price hike in the following pattern

Honda Atlas Cars Pakistan Ltd.

Models Dec-20 Jun-21 Jul-21 Dec-21 Jan-22 Mar-22 Apr-22 % (Dec-20-
Apr-22)
Honda Civic Car 2YN RS CVT YA8 - - - - - 5,099,000 5,399,000 5.88%
( Turbo) 1500cc
Honda Civic Car 2YN VTI CVT - - - - - 5,399,000 5,649,000 4.63%
YB7 ( Turbo) 1500cc
Honda Civic Car 2YN VTI-B CVT - - - - - 6,149,000 6,499,000 5.69%
YC7 ( Turbo) 1500cc
Civic i-VTEC (1.8) 3,499,000 3,729,000 3,614,000 3,979,000 4,079,000 Disc Disc -
Civic i-VTEC Oriel (1.8) 3,749,000 3,979,000 3,864,000 4,259,000 4,366,000 Disc Disc -
Civic 1.5 RS Turbo - 4,699,000 4,564,000 5,049,000 5,175,000 Disc Disc -
Honda City 1.2 MT - - 2,599,000 2,729,000 2,729,000 3,129,000 3,129,000 20%
Honda City 1.2 CVT - - 2,769,000 2,949,000 2,949,000 3,249,000 3,249,000 17%
Honda City 1.5 CVT - - 2,899,000 3,069,000 3,146,000 3,446,000 3,446,000 19%
Honda City Aspire 1.5 MT - - 3,019,000 3,199,000 3,279,000 3,579,000 3,579,000 19%
Honda City Aspire 1.5 CVT - - 3,189,000 3,369,000 3,454,000 3,749,000 3,749,000 18%
BRV i-VTEC S 3,399,000 3,479,000 3,374,000 3,599,000 3,689,000 4,079,000 4,079,000 20%
https://honda.com.pk

20
  The makers of Toyota cars announced the price hike in the following pattern

Indus Motor Company Ltd

Models Dec-20 Jun-21 Jul-21 Dec-21 Jan-22 Mar-22 Apr-22 %
(Dec-
20-
Apr-
22)
Corolla MT 1.6 - 3,219,000 3,109,000 3,299,000 3,380,000 ↑ 0 0 -
Corolla AT 1.6 3,309,000 3,369,000 3,249,000 3,449,000 3,534,000 ↑ 0 0 -
Corolla AT 1.6 SE - 3,699,000 3,599,000 3,799,000 3,892,000 ↑ 0 0 -
Corolla X Altis CVT-i 1.8 - 3,699,000 3,579,000 3,779,000 3,872,000 ↑ 4,299,000 4,299,000 16.22%
Corolla X Altis Grande CVT-i
3,899,000 3,979,000 3,869,000 4,079,000 4,179,000 ↑ 4,649,000 4,649,000 19.24%
1.8 (Beige Interior)
Corolla X Altis Grande CVT-i
- 3,999,000 3,889,000 4,099,000 4,199,000 ↑ 4,689,000 4,689,000 17.25%
1.8 (Black Interior)
Yaris GLI (1.3) GLI MT 2,509,000 2,509,000 2,409,000 2,549,000 2,612,000 ↑ 2,899,000 2,899,000 15.54%
Yaris GLI (1.3) GLI CVT 2,689,000 2,689,000 2,589,000 2,749,000 2,817,000 ↑ 3,109,000 3,109,000 15.62%
Yaris ATIV (1.3) MT 2,619,000 2,619,000 2,519,000 2,679,000 2,745,000 ↑ 3,059,000 3,059,000 16.80%
Yaris ATIV (1.3) CVT 2,769,000 2,769,000 2,669,000 2,849,000 2,919,000 ↑ 3,229,000 3,229,000 16.61%
Yaris ATIV X (1.5) MT 2,829,000 2,829,000 2,719,000 2,899,000 2,970,000 ↑ 3,289,000 3,289,000 16.26%
Yaris ATIV X (1.5) CVT 2,999,000 2,999,000 2,899,000 3,099,000 3,175,000 ↑ 3,499,000 3,499,000 16.67%
Hilux 4x2 N/A 3,889,000 3,819,000 4,019,000 4,049,000 ↑ 4,609,000 4,609,000 18.51%
Hilux 4x2 S/C UPSPEC N/A 3,919,000 3,849,000 4,049,000 4,079,000 ↑ 4,639,000 4,639,000 18.37%
Hilux Deckless N/A 3,639,000 3,569,000 3,769,000 3,799,000 ↑ 4,279,000 4,279,000 17.59%
Hilux 4x4 N/A - - - 5,469,000 - 6,109,000 6,109,000 11.70%
Hilux E N/A 5,959,000 5,859,000 6,149,000 6,249,000 ↑ 7,059,000 7,059,000 18.46%
Hilux 4x4 D/C REVO G MT N/A 6,549,000 6,429,000 6,759,000 6,947,000 ↑ 7,659,000 7,659,000 16.95%
Hilux 4x4 D/C REVO G AT N/A 6,899,000 6,779,000 7,109,000 7,306,000 ↑ 8,029,000 8,029,000 16.38%
Hilux 4x4 D/C REVO V AT N/A 7,499,000 7,379,000 7,779,000 8,032,000 ↑ 8,839,000 8,839,000 17.87%
Hilux 4x4 D/C REVO ROCCO N/A - - - 8,472,000 - 9,319,000 9,319,000 10.00%
FORTUNER SIGMA 4 (4X4
9,149,000 9,649,000 9,269,000 9,849,000 10,392,000 ↑ 11,489,000 11,489,000 25.58%
Hi)
FORTUNER V (4X4 Hi) 8,399,000 9,299,000 8,899,000 9,399,000 9,941,000 ↑ 10,949,000 10,949,000 30.36%
FORTUNER G (4X2 Std) 7,699,000 7,999,000 7,649,000 8,149,000 8,569,000 ↑ 9,499,000 9,499,000 23.38%
FORTUNER Legender (4X4
- - - - 10,842,000 - 12,099,000 12,099,000 11.59%
Diesel)
http://www.toyota-
indus.com

21
  During the same period, Pak Suzuki Motor Company Limited (PSMCL) has raised the price
in following manner.

Pak Suzuki Motor Company Ltd

Models Dec-20 Jun-21 Jul-21 Dec-21 Jan-22 Mar-22 Apr-22 % (Dec-20-
Apr-22)
Alto 660 VX 1,198,000 1,198,000 1,113,000 1,274,000 1,306,000 1,306,000 1,425,000 18.95%
Alto 660 VXR 1,433,000 1,433,000 1,335,000 1,508,000 1,546,000 1,546,000 1,675,000 16.89%
Alto 660 VXL 1,633,000 1,633,000 1,521,000 1,704,000 1,747,000 1,747,000 1,886,000 15.49%
Wagon-R VXR 1,640,000 1,640,000 1,530,000 1,760,000 1,877,000 1,877,000 2,019,000 23.11%
Wagon-R VXL 1,730,000 1,730,000 1,610,000 1,852,000 1,975,000 1,975,000 2,129,000 23.06%
Wagon-R AGS 1,890,000 1,890,000 1,760,000 2,024,000 2,158,000 2,158,000 2,319,000 22.70%
Cultus VXR Euro II 1,780,000 1,780,000 1,655,000 1,904,000 2,030,000 2,030,000 2,250,000 26.40%
Cultus VXL 1,970,000 1,970,000 1,830,000 2,105,000 2,244,000 2,244,000 2,474,000 25.58%
Cultus AGS 2,130,000 2,130,000 1,975,000 2,272,000 2,422,000 2,422,000 2,662,000 24.98%
Swift AT Navi 2,210,000 2,210,000 2,148,000 Disc Disc Disc Disc -
Swift DLX Navi 2,210,000 2,030,000 1,972,000 Disc Disc Disc Disc -
Swift GL (New Model) - 0 0 0 0 2,499,000 2,694,000 7.80%
Swift GL-CVT (New
- 0 0 0 0 2,699,000 2,908,000 7.74%
Model)
Swift GLX-CVT (New
- 0 0 0 0 2,899,000 3,169,000 9.31%
Model)
Bolan (800 cc) 1,134,000 1,134,000 1,049,000 1,149,000 1,178,000 1,178,000 1,283,000 13.14%
www.paksuzuki.com.pk

Devaluation of Rupee against US Dollar:

The prices of cars increase due to consistent depreciation of Pakistan currency against dollar. The
increasing prices of dollar impact the prices of imported raw material.

 The rupee devaluation will trouble car purchasers as prices of variants will increase further.
There is a need to reassess the market based on recent happenings. The only benefit local
car manufacturers see out of this is the possible decrease in imported vehicles’ number
since their cost will go up. There has been a need for a realistic evaluation of exchange
rates

A rise in Demand and Premium Charged:

There has been an increase in demand for cars substantially due to three reasons – surging rural
i) Buying in the wake of good crops of cotton, wheat, rice, etc.
ii) Due rise in home remittance and improvement in the sale of cars through bank leasing.

According to the figures released by Pakistan Automotive Manufacturers Association (PAMA). It

has also been observed that the authorized dealers are openly charging premiums to customers
who cannot wait for delivery.

22
Just recently on the launch of the New Civic CVT YC7 (Turbo); multiple customers reported to
have paid an amount from Rs 500,000 to 1,000,000 just for purpose of owning the vehicle.

Vehicles Premium
Rupees
Corolla Xli 300,000 to 500,000
Corolla GLI 400,000 to 500,000
Suzuki Alto 150,000 to 250,000
Suzuki CULTUS, Swift 300,000 to 400,000
Honda Civic 500,000 to 1,000,000
Toyota Yaris 200,000 to 300,000

Recently, Indus Motor Company (IMC) has asked the consumers to say no to premium and wait for
the delivery of their cars as the company is continuously increasing its production to meet the
demand. Apart from the dealers some consumers claiming to be genuine, are also lifting cars and
selling them at a premium. This has also resulted in the entry of new investors, middlemen, and
speculators into the auto market. To deal with this Confusing situation IMC has proposed the
Ministry of industries implement suggestions of mandatory registration for six months or a heavy
transfer fee in case of ownership changes within the first six months of purchase of a vehicle to
curtail the market malpractice of premium. There should be legislation to prohibit premiums
charged by the manufacturers and the dealers.

Impeding Elements:
1. Heavily reliance on imported “Completely Knocked Down” (CKD) Kits.
2. Ineffective implementation and monitoring of the deletion program have resulted in lesser
deletion in the car industry as compared to 84 percent in Tractors and an average of 50
percent in Bus and Truck manufacturing.
3. Lack of spare parts market for vendors as they are bound to sell parts to the assemblers only.
4. Delays in inspection and approval of parts by the parent company. A part developed locally has
to be sent to Japan or Korea for approval.
5. Small size of the market resulting in under capacity utilization. The vending industry, which
comprises 400 units, is operating at just 30 percent of its capacity.

23
6. Indifferent attitude of the assemblers i.e., a component developed for one assembler is not
accepted by others.
7. Powerful lobbying group not in favor of the Local Auto industry
8. Smuggling of cars from neighboring countries like Afghanistan.
9. The industry is far behind the schedule of the deletion program as indicated by WTO. It is
simply importing CKD kits to assemble vehicles locally, which means minimum inclusion of
local components. The result is inflated profits for foreign-based manufacturers, fewer
employment opportunities for the local engineering sector, little technology inflows, and
inflated market rates for locally manufactured automobiles.
10. The vendor market hasn’t developed to the extent that it can provide the same quality
supplies as those imports. Unabated smuggling of auto parts has hamstrung the development
of the vendor industry. It will take a few years to meet the entire demand for spare parts for
expanding the automobile industry.
11. The Vendor industry plays a critical role in the growth of the auto industry as all the parts are
not manufactured under one roof. Development of the vendor industry would be able to
expand the employment opportunities, reduce in cost of production, and imports.

OVERALL CONCLUSION

Profitability study has revealed that there are no substantial disparities in profit, and the profit
figures of all of these businesses appear to be normal. However, a direct cost and operational
expense study reveals that the main reason for the high pricing of automobiles in Pakistan is an
increase in the price of components or parts.
 Three main outcomes have been found from this study;
1. No substantial disparities in profit, profit figures appear to be normal.
2. Reason for high pricing is increase in price of components or parts. Perception is foreign
components price increase is main ingredient, which effects in three ways.
• Increase in payment to foreign manufacturers.
• High impact due to rupee dollar parity.
• Low tune of tax payment due to decrease in profit amounts.

3. Non-development of local expertize in manufacturing of car essential ingredients.

24
RECOMMENDATIONS

a) It is recommended based on results that further understanding should be developed.

b) Knowledge to be sought for detailed understanding
c) Include further OEM manufacturers
d) Make detailed cost wise study
e) Bifurcate imported or locally manufactured items
f) Identify reason for non-development of local sector
g) Consider impact of workmanship and decrease of labor cost
h) Analyze trend of ROI over a span of more than 5 years
i) Study local manufacturing behavior
j) Understanding local investment in OEM and component sector

25