Cars are getting pricier again. For the third time since December when the currency first started to take its downward spiral, local automakers have raised prices. Whereas Suzuki raised prices by as much as Rs30,000, Toyota raised prices between Rs50,000 to Rs1.9 million for some of its imported vehicles. Honda, on the other hand, raised prices by up to Rs100,000. The Rupee to US Dollar depreciation continued well into July – falling by nearly 15 percent since December. Against the Japanese Yen, the Rupee fell by 17 percent during this period.
The price-hikes have been associated to high costs of manufacturing – not only rising costs for Completely Knocked Down (CKD) kits; but also locally-manufactured auto parts. According to data reported by Pakistan Bureau of Statistics (PBS), cost of CKD imports for motorcars went up by 21 percent between July-May 2018 whereas sales during the period rose by 16 percent.
Existing OEMs and auto-part makers are still dependent on imported CKD kits, functional parts, and commodities like iron, steel, aluminum, plastic etc. which are mostly imported. In an interview with BR Research, the Chairman of PAAPAM, Iftikhar Ahmed shared his estimates for localization in the cars segment, putting Suzuki’s at more than 70 percent, Toyota more than 55 and Honda around 51 percent. On average, he believes localization should be around 60-61 percent for all the three OEMs.
This means, nearly 40 percent of the content is still of imported value.
BR Research’s own calculations suggest localization levels during FY17 for an average car manufactured in the country may be 51 percent – (read “The Fault in our Cars”, published Feb 6, 2018) – whereas share of imported content in car prices would be around 22 percent. The rest is sales tax and customs duties. If imports become expensive, tax collected is also higher. Moreover, for cars with strong demand like Wagon-R or the more sophisticated SUVs or cross-over SUVs like Toyota Fortuner or Honda BR-V, localization is not a lot. This means, OEMs have no choice but to raise prices to keep their margins intact.
The second major factor is steel commodity. While devaluation alone can take up the cost of imported steel, the commodity itself has been seeing a global price hike. Pakistan mainly imports steel from China, UK, US, UAE and Japan. Between April 2017 and February 2018, Chinese steel prices have gone up by 23 percent.
However, the tariffs imposed by the Trump administration on steel and aluminum may cause a disruption in prices. If US stops being open to steel, manufacturers will see a buildup of inventories and supply glut could result in price slumps. This could benefit Pakistani local autos and auto-part makers since they import a good quantity of metal commodities, especially steel.
Based on PBS data, steel imports into Pakistan grew by 16 percent in value and by 13 percent in volume in between July 2017 to May 2018, so per ton cost of imports has risen by 3 percent. If imported price of steel actually does go down, auto-part makers may not have to raise prices for OEMs, who in turn may not have to raise prices for consumers. However, prices will have to be adjusted if currency continues its slide. For major car models, price hikes so far have been between 4 percent and 13 percent – higher for more high-end cars. Demand is unlikely to suffer.
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