Performing At Top Gear

By diversifying, United Motors has softened the impact of import duty fluctuations and even leveraged a few benefits.

Businesses often become victims of governments that don’t practise stable policy, but United Motors has not only mitigated the impact of import duty fluctuations in recent years, but maneuvered them to its advantage to race to the top of the fleet of listed motor vehicle importers.

Recent Sri Lankan governments have used vehicle import duties to control the balance of payment, resulting in a constantly changing import duty structure. High import duties usually lead to lower imports, while a tax cut results in a surge in motor vehicle sales. Uncertainty about a new duty’s effect on the selling price of imported units poses difficulty for importers, as a new duty can up the price of a certain brand or model, leading to a non-sale.

Import duties on vehicles have been the biggest deciding factor on motor vehicle sales in recent years. A cut in import duties in 2010 led to a 76% surge in motor vehicle registrations that year and a further 46% increase in 2011. After import duties were revised up in 2012, registrations dipped 24% in 2012 and 17% in 2013. In 2014, import duties were cut again, resulting in a 32% surge in registrations. This accelerated to 90% in the first half of this year.

g6In spite of this changing import duty scenario, United Motors has maintained consistently high gross and net profit margins compared with peers – they were at a respective 26% and 12% in 2015 – indicating efficient cost management. The company has also maintained a consistently strong market share over the past nine years.Net profit for 2015 was at Rs1.3 billion.

g5Founded almost 70 years ago, United Motors is one of Sri Lanka’s oldest vehicle importers. It has benefitted from early lock-in of the sole distributorship of Japan’s Mitsubishi Motors and from regularly signing on more sole distributorships over the years. Today it markets a fleet of automotive products, with its current product range beating those of other listed importers by a long way. The group has over 2,000 dealers, while its 7-acre modern workshop employs over 300 staff.

United Motors’ success has been due to its ability to cushion itself against the impact of external factors, such as government policy changes like import duty and macro changes like fuel prices and interest and exchange rates, through strategic diversification.

Firstly, it has built a much more diversified product and brand portfolio than its peers, which means it can better mitigate risks posed by external fiscal shocks, as these affect different brands and products differently. Its vehicles range from high luxury such as the Mitsubishi Montero to three-wheelers, motorbikes and even dual purpose vehicles and buses, while its other products include spare parts, lubricants and tires.

In spite of this changing import duty scenario, United Motors has maintained consistently high gross and net profit margins compared with peers – they were at a respective 26% and 12% in 2015 – indicating efficient cost management

Altogether, the company has 12 leading world brands under its roof. United Motors has been able to find relatively unknown brands and introduce them successfully to Sri Lanka. One example is how it has turned the Malaysian brand Perodua into a wellknown, in-demand brand in the affordable category.

g4The company has expanded in certain directions according to market changes. When it saw the emergence of a middle class with strong purchasing power to buy three-wheelers and motorbikes, it entered this market in 2003 with a joint venture with TVS in India. Today, the company has a 14% market share in motorbikes and a 5% share in three-wheelers.

“As a trading business, it’s important for a company to identify thec orrect product at the correct time and introduce it to the correct market segment,” says Gayan Rajakaruna, who covers United Motors at stockbrokers LOLC Securities. “Of the six listed companies, United Motors has done that best, and this has helped them to be very successful, helped them capitalize on tax advantage. They’ve introduced the right products and got them populated in local markets.”

Secondly, on top of this product and brand diversity, United Motors has also diversified itself in the motor sector value chain by expanding its operations to vehicle assembly, after-sales services and product diversification into lubricants and tires.

g3In 2009, the government decided to remove excise duty on vehicles assembled in the country, which automatically dropped their price to half that of imported ones. United Motors immediately obtained a license to set up a local assembly facility to capture demand for SUVs. “United Motors’ advantage is that it makes very strategic decisions like setting up this assembly plant,” says Shehan Bartholomeuz, Head of Research at LOLC Securities.

Diversity in the value chain mitigates risk for United Motors, especially in times of uncertainty like the present, when the upcoming budget is expected to be very negative for vehicle importers. “Since United Motors is also uncertain about what will happen in the upcoming budget, it’s promoting its aftersales service and spare parts businesses,” says Bartholomeuz. These two business account for about 20% of the company’s turnover currently. “If the budget is very negative on vehicle imports, the company will put more weight on developing these other businesses. In that way, they’re verystrategic on how to play the game. They will anticipate what’s going to happen and get ready to tackle it.”

“Of course, these other businesses are only a short-term solution,” Rajakaruna adds. “United Motors can’t survive on aftersales and spare parts in the long term.”

United Motors has also maintained almost zero long-term debt over the past five years, which means the company could easily leverage if it sees prospective investments

The company has also been able to respond quickly to import duty changes to capitalize on them. When the 2014 budget reduced taxes on hybrid and electric vehicles, the company added the Mitsubishi PHEV to its already diverse portfolio to benefit from the tax cut on hybrids. Similarly, when there was a 35% reduction in the cost of passenger vehicles due to a tax cut at a time of rapid economic growth in 2010, United Motors introduced the Mitsubishi Outlander and increased its supply of the Perodua Viva to the market to take advantage of the fast expansion in the motor vehicle sector.

In 2011, the company added the new Mitsubishi Montero to gain on increasing demand, launched the DFSK mini truck to capitalize on a tax advantage and introduced the TVS Vego scooter to gain on growing motor cycle demand. When the 2015 interim budget reduced taxes on small vehicles, United Motors quickly decided to market the 998-CC Perodua Axia. It ran into a small snag when there was a manufacturer’s delay in supplying this successor to its Viva model, but United Motors was able to eventually offer the Axia model, which saw rapid purchases, with a modest 2016 sales volume of 500 expected to jump to 1,100 by 2017.

g2“United Motors’ management is capable of making timely decisions to capitalize on ongoing events,” says Bartholemeus. “Before other players, they developed relationships with some of China’s big automakers. They’re scoping out what China can bring to this country in the near future. I think management capability is very strong.”

United Motors was the first to start assembling vehicles originating in that country. “The product is very good, and it has a history of brand value in China,” says Bartholemeus. “And that’s enough because this kind of product doesn’t need to have the “Made in Japan” tag to market to the masses. There are only a couple of other companies that are looking at benefitting from this angle.”

With rising per capita income increasing vehicle affordability and with consumption expenditure rising, the motor vehicle sector is one of the fastest-growing in Sri Lanka. New vehicle registrations have seen consistent growth since 2010.

Sri Lankans spend one-fifth of their consumption expenditure on transport – behind only food and beverage in importance. As the country transitions into an upper middle-income country,  motor vehicle demand should increase steadily. In 2014, there were 5.6 million vehicles in the country, of which 2.9 million were motorbikes. This means Sri Lanka has very low vehicle penetration – only one vehicle for every four people – as well as low vehicle density, with only India among its regional peers having a lower number of vehicles per 1km of road. This should result in rapid growth of the number of passenger vehicles, motorcycles and three-wheelers; all three are categories in which United Motors is present.

gWith a strong correlation between vehicle population growth and per capita income over the past ten years, Sri Lanka’s expected economic growth should ensure that the vehicle population hits 7.5 million by 2017. Although some analysts are predicting a negative next six months in the motor sector due to uncertainty about the upcoming budget, the long-term outlook for the motor sector is still very positive.

United Motors is in a prime position to take advantage of this continuing growth. On top of the company’s diversification, it has a strong balance sheet; its Rs10.4 billion market cap for 2015 is the highest among listed vehicle importers. Its cash base has been consistently higher than peers, with its balance at Rs1.4 billion in June 2015. United Motors has also maintained almost zero long-term debt over the past five years, which means the company could easily leverage if it sees prospective investments.