Strong new vehicle sales in the first four months of FY2007/08 (ending June 2008) have prompted BMI to raise its sales forecast for the year. BMI has raised its passenger car sales forecast for FY2007/08 and the rest of the forecast period, with sales growth of 3%, while we retain our forecast of overall vehicle sales growth of just over 4%. Car sales of 57,167 units for the first four months of FY2007/08 (August to October) support this forecast.

Production strength in the four-month period, however, has led to an upwards revision of our production forecast for the current financial year to overall growth of 6.25%, largely based on an increase in our projection for passenger car production growth to 10% y-o-y. The commercial vehicle segment could feature in the industry's overall production growth, if a proposed joint venture between China's Dong Feng Automobile Company and Pakistan Automobile Company (PACO) comes to fruition.

Pakistan's Federal Minister for Industries, Jahangir Khan Tareen has given his blessing to the project, stating that it fits with the government's policy of encouraging investment. Fuelling the government's efforts to make the industry globally competitive is a recent contract in excess of US$1mn, awarded to Pakistan components maker Transmission Motor Company (TMC) to supply components to a division of Chrysler.

Global Electric Motorcars (GEM) produces electric vehicles for global sale and has formed a long-term partnership with TMC, which could eventually lead to the assembly of electric cars in Pakistan. As an investment destination, Pakistan ranks joint fourth in BMI's Business Environment Rankings for the automotive industry in the Asia Pacific region.

The low level of vehicle ownership suggests that there is scope for further sales growth, while a reasonably low number of incumbent producers means that the market is not yet saturated in terms of supply. However, the risk of inflation on the back of strong economic growth and political unrest drag on Pakistan's overall score, while its CBU output potential is also lower than its regional peers for our forecast period to 2012.

Japanese car manufacturers control most of Pakistan's passenger car production and sales. Figures for FY2006/07 show that Suzuki models represented 58.8% of total Pakistani passenger car production and 57.1% of sales; in the first four months of FY2007/08 (Jul 07-Oct 07), Suzuki represented 61% of production and 61% of sales. However, the Toyota Corolla took over in the first four months of FY07/08 as Pakistan's most popular model with 21.3% of sales, followed by FY2006/07's most popular model the Suzuki Mehran, with 20.8% of sales. Honda is Pakistan's third-largest car producer and has a 9% market share.