Despite all the signs indicating a downtime in the automotive industry, demand for passenger cars is persisting. In 4MFY19, sales grew by four percent, and between Oct-18 and Sep-18, sales were boosted by 26 percent. Talk about exceeding expectations. The three car makers have just come out of announcing their fourth (fifth for Suzuki) price increase across different variants. By Jan-19, Indus Motors and Honda will have raised prices by over 18-21 percent cumulatively since Dec-17 (read: “Car prices: Is there method to the madness?” Nov 5, 2018). The tremendous volumetric bump in Oct-18 may be an early sign of demand weakening later on.
According to Pakistan Automotive Manufacturers Association (PAMA), vehicles like jeeps, pickups, commercial vehicles and tractors are the losers so far, failing to grasp a higher demand. Especially, locally manufacturing trucks are just not selling as much as they used to, and it is possible they are being replaced by imported trucks in the market. It may very well be an indication of a slowdown in the commercial segment overall.
The question is whether this demand slowdown comes due to the increase in prices or other macro changes to the economy. OEMs across all segments have been raising prices due to the rupee devaluation that along with higher commodities prices have made imports, i.e. inputs for assemblers, more expensive.
For the motorcycle segment, which is a super competitive industry with a range of local as well as imported (mostly Chinese) substitutes, not to mention, a vibrant second-hand market, this price increase may mean much more than other segments. Sales for rickshaws and motorcycles, which haven’t seen a dull day in the past few years, also fell by 2 percent in 4MFY19. Another factor may be auto financing since motorcycle buyers have increasingly leant on bank loans to procure their two and three wheelers.
Higher interest rate with a subsequent increase in the offing, and another round of rupee devaluation may very well push volumes over the edge. For passenger cars, buyers are weighing their options. Mehran buyers would rather wait for the much awaiting Alto (sales up: 23%), plus Suzuki has already decided to phase the variant out of the market soon. Buyers of vehicles like SUVs (Toyota Fortuner sales: down 23%) and cross-over SUVs (Honda BR-V sales: down 43%) tend to view these variants as luxury goods which means higher prices, together with expensive financing may be a good deterrent for them to look for other options or wait till the storm subsides.
Higher-end car buyers of Honda City/Civic and Toyota Corolla may rush to the showrooms before Jan’s further price increase, which may prove to be debilitating to the demand as 2019 kicks in. Since 40 percent of car buyers are procuring vehicles through bank financing, higher costs that may also de-motivate buyers.
So far, the restriction on non-filers to be able to buy vehicles has not affected demand as much as it was expected. This may be because non-filers are not buying directly from the companies, and may be paying a premium over the costs to outside investors. Is the policy disallowing non-filers from buying vehicles, numbers are not corroborating that at all.
One would assume that higher prices would be most disturbing for car buyers in the mid-range category but Cultus and Wagon-R have not disappointed Suzuki just yet (up:16%). Middle-income buyers do tend to be more sensitive to price increases, but there is also the fact that buyers of this category may not have any other choice. Wagon-R is still the more sensibly priced vehicle in this category, even after the price bump of 16 percent, given it has no local substitutes, and considering most of its peers in the used car market are by-far pricier.
Would demand persist if prices are further raised and financing becomes even more expensive? It’s debatable. For the higher-end segment, there is also the lure of upcoming new players in the market that may just pique interest of car buyers enough, not to mention, provide substitutes to the starved market. OEMs have to tread carefully.
Comments
Comments are closed.