Autos: Supply slide

Indus Motors (PSX: INDU) announced last week that while the company is shutting down production operations temporarily until the end of this year, it will not be laying off its employees. Certainly, the company has had a hard time keeping up with the usual supply- given supply constraints- and having to keep the production plant closed for many days during the past few months, the company’s liquidity condition is certainly not dire enough (yet) that it cannot meet its short-term obligations or make payroll.

In 5MFY23, the average sales for Indus Motors dropped from nearly 6,400 units per month of sales last year to some 3,000 units per month, slashed by half. Total industry sales during the period have dropped by 40 percent in the Jul-Nov period. The drop in production is expected to persist as auto assemblers are unable to secure the supply of their components and completely knocked down (CKD) units from abroad as the government has asked assemblers to obtain prior approval for imports. There are informal quotas in place that have caused nearly all assemblers to slash production down. If supply restrictions ease, would demand-side indicators hurt production further is another question altogether.

According to the Pakistan Bureau of Statistics (PBS) trade data for October, imports of CBU are down 65 percent while CKD imports are down 35 percent in the cumulative period since July of this fiscal year. The drop in sales during the period for assembled vehicles by 39 percent is not shocking. While current volumes are certainly low, they are still higher than in FY20 when the economic downturn and covid had forced sales to plummet. In fact, volumes today are still higher than volumes prior to FY16 when a new wave of volumetric growth took over the industry leading to marked growth.

Though the economy is still in a precarious place and it would be premature to say when import restrictions lift, but the real impact of demand on the industry could only be seen then. Logic says volumes would continue dropping because of higher prices, overall inflation, high cost of borrowing, but because of the lack of saving options, and the so-called ‘fear of missing out factor where consumers always expect car prices to go up, it is expected that volumes would not drop dramatically due to demand. The demand perseverance is likely a dominant reason why the government was so steadfast in imposing import restrictions.