Pakistan Suzuki Motor (PSX: PSMC) has now raised its prices for the fourth time since December 2017 for a range of its cars and motorbikes even as the rupee began to recover. Honda and Toyota had also raised prices in three phases along with Suzuki due to the depreciation of rupee against dollar but they had perhaps planned better as Suzuki raised prices on average by 7 percent across variants while Corolla’s price was raised by 13 percent, Civic (10%), City (11%) (Read “Third time’s the charm”, published July 10, 2018). Suzuki now comes at par with an average 10 percent hike, raising prices for Mehran and Bolan by 15 and 11 percent respectively.
The cause is not just rupee depreciation making import of CKDs more expensive. Automakers and auto parts makers also use imported steel and other commodities (aluminum, plastic etc.) to locally manufacture parts so the effect of depreciation plus global steel prices moving north made price hike inevitable for local automobile industry. Steel prices have also been raised by domestic manufacturers.
For Mehran, this hike is the highest, which could be surprising since the car is more than 90 percent localized. For cars like Wagon-R which are only about 30-40 percent localized, the 9 percent price hike makes sense. Mehran’s price bump however is short lived since the company has made the final call on production after two decades of manufacturing that model.
Over the years, the car has received mixed reviews with consumers complaining that it was the cheapest quality of cars currently being produced in the world. Others contend it was inexpensive to buy, with very low maintenance costs in a country that has a dearth of affordable cars for the average consumer. The used cars variants coming into the country have become alternatives for small affordable cars, like Mehran, but the car never lost its demand and until the very end remains Suzuki’s highest selling vehicle.
Looking at import numbers, according to data reported by Pakistan Bureau of Statistics (PBS), CKD imports for motorcars went up by 23 percent between July-June 2018 in dollar terms, whereas sales units of locally manufactured cars rose by 17 percent during the period. Steel imports in dollar value grew by 15 percent while in volume, they grew by 13 percent.
Steel imports will remain a fixture in the local automotive industry and global price disruption will affect companies’ costs. The U.S. is the biggest importer of steel and US President Donald Trump recently announced hefty tariffs on steel and aluminum from China and other country to boost the local steel manufacturing industry.
Some analysts say that countries exporting to the US may have to divert their supply onto other countries, which could cause a supply glut in the global trading market. This could cause prices to slump and help Pakistani automakers. However, analysts at Wood Mackenzie argue that only 18 million tons would be diverted to other markets which is less than 4 percent of annual traded volumes and not big enough to have a global impact on prices.
If steel prices sustain or increase further and if currency weakens again, automakers will have to be careful about raising prices for consumers. Other economic fundamentals are also changing. More than 40 percent of cars bought in the country are on auto financing, which means that interest rates may clip auto demand.
Moreover, restrictions on non-filers to purchase cars have already reduced the backlog in bookings. Though the restriction has been relaxed for small engine cars now, the demand for high-engine cars will suffer as most car buyers are not in fact, filers of income tax.
All these factors will have an impact on demand. Needless to say, this doesn’t leave much space for automakers to continue bumping up the prices to protect their margins.
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