A lot has happened since last month. Auto sales are still going strong compared to last year. For now. Factors such as reduced prices of cars due to government slashing taxes on vehicles and cheaper car financing got all the motors running of prospective car buyers—from SUV users at the high-end down to middle-income Alto buyers. Sales volumes in 1Q for passenger cars, LCVs and SVUs grew 92 percent year on year selling 50,000 vehicles in the first quarter. Suzuki has registered the biggest recovery with sales of locally assembled vehicles growing 120 percent in 1QFY22, followed by Toyota’s 56 percent and Honda’s 23 percent. But a storm here has started to brew.
The chip shortage in the international market is expected to cause production delays. Around the world, the supply is tight and manufacturers willing to pay the price for the dearer chip are able to keep production levels intact, but barely. Most automakers have been rationing orders and in turn, have been making less bookings for their vehicles. Car buyers will have to wait longer to get their vehicle and will have to a pay a higher price for it. American Automaker Ford was found producing vehicles without all the required chips that go in, with inventories lining in the lots waiting to be “chipped”. A consulting firm estimated that the global automobile industry will lose some $210 billion in revenue in 2021. The end is not in sight and the shortage may continue till Dec, or even more.
Pakistani automakers have started feeling the heat. Look how close the production and sales volumes are (see graph). Suzuki and Kia are having trouble procuring chips. Visibly from data, Sep-21 shows all of Suzuki vehicles have recorded month-on-month decline (Ravi 26%, Swift 44%, Alto 10% and Bolan 19%). Meanwhile Toyota is managing the situation. These delays from factories will certainly cause premiums to rise in the market for car buyers eager to get behind the wheel. No government pressure so far has worked. Inevitably when the chip shortage—and the costlier production of vehicle because of it, not to mention, the recent episodes of currency depreciation hit automakers—cars will see another series of price hikes.
This why government’s earlier move to slash taxes and duties in a bid to make cars more affordable was short-sighted (read: “Autos: Wind back in the sails”, Sep 22, 2021). Now couple all this with the most recent decision for the SBP to put restrictions on car financing to curb imports and safeguard balance of payment. Whether the government likes it or not, this will affect volumes and its entire premise of slashing its own taxes to then later make up for it through higher volumes will be defeated almost prematurely. Perhaps the test-case would not fail if global supply chain situation was normal. But it is not.
And for that reason too, the limits on car financing will also prove to be futile as volumes are going to grow less and less anyway.
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