After monthly sales crossed 13,000 in Jun-24—highest sales in 17 months—automobile sales over the last two months have returned back to a lull. Demand may have surged in June as customers may have wanted to avoid the impact of budgetary measures, including tax increases. But now that new taxes are in, sales are down again. This is despite the policy rate being slowly but surely lowered. Though far from the lows in the past—the period between Jun-20 and Aug-21 comes to mind when the policy rate was only 7 percent.
But it’s on the way. Expectations are that the policy rate will fall down from its current 19.5 percent to 14-16 percent over the coming fiscal year. That may still be too high for new borrowers against car ownership, though it may bring in more corporate buys. There is a profound impact on car sales when interest rates are rising, and in fact, car loans as well as car sales flourished when loan rates were lower and terms flexible. As of now, SBP’s tightened regulations on car financing terms introduced in late 2021 and early 2022 remain intact which will ensure fewer car loans doled out along with a large portion of potential car buyers dissuaded by persistently high cost of borrowing.
Other reasons for subdued demand are the usual suspects—suppressed buying power, delayed economic recovery, still fairly high inflation, and increased tax incidence. Companies will have to get creative to boost sales. Kia’s recent scheme to increase sales of Stonic fell flat as the company is stumbling to make good on its delivery promises. Suzuki meanwhile is going the cheaper financing route by offering a flat 17.7 percent mark-up on Alto, Wagon-R, Cultus, and Swift with preferred delivery. The tenor will be five years for these loans and upfront equity will be 30 percent. This is a reasonable offer compared to the prevailing loan terms by other banks.
With this offer, car buyers can pay Rs58,482 in monthly installments to purchase Alto AGS; perhaps the most desirable car in the market at the moment based on its fuel economy not only for small families and individuals but those using their cars commercially in the ride-sharing economy. In FY24, Alto’s share in total passenger cars stood at 44 percent and in FY25 thus far, the share is 40 percent.
Improving demand in the upcoming months hinges on how Suzuki’s offer pans out. As long as the prevailing interest charged by banks is higher than 17 percent and that will not happen until the policy rate falls to 12 percent (banks typically charge 4% premium), this scheme may invite more and more interested parties. Other companies may come up with their own set of schemes to boost volumes but they may just be happy with how they are faring right now. Both Honda and Toyota have seen an upward surge in sales in Aug-24 and waiting for the market to normalize as best may be these companies’ best bet after all. Indus Motors for one is doing phenomenally well financially considering all known factors.
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