The auto industry may have found a bit of traction in the last three months, but the ride ahead looks bumpy. Although, local car makers have started raising retail prices, their margins are under significant threats, seen growing in a not so distant future.
Yen, which has already been appreciating - rising nearly 10 percent against the rupee - in the last quarter, is seen strengthening further in the remaining fiscal year. With crude oil price gradually moving northwards, the rupee is likely to get weaker owing to which automobile manufacturers will have to pay higher price for imported auto parts, which constitute about 35 to 40 percent of total auto manufacturing parts used by local producers.
Second, if global commodity prices keep bouncing on hopes of economy recovery, then international steel price would also rise - increasing their manufacturing cost and shrinking gross margins.
Then there are other cost push and administrative factors within the domestic environment. Although, inflation has tapered off relative to last year, local original equipment manufactures are still facing high input costs in a double-digit interest rate scenario. This makes them fairly uncompetitive in their struggle against counterfeit, smuggled and under invoiced auto part imports.
If things worsen as feared, PSMC's sales would be worst hit, since it doesn't have much room to increase retail prices - being a low end car producer - compared to its peers INDU and HCAR which mostly target high end consumers. On the flipside, if it doesn't pass on the costs to buyers, its margins will squeeze sharply.
And if this isn't enough, the likely emergence of Chinese competition threatens their business model further. A certain Chinese Automobile Manufacturing Company is aggressively eyeing Pakistani market with plans to flood it with low cost vehicles. While this may not be of considerable threat to upscale car makers, it can kick start a tough price competition in lower price segments.
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