Nearly all signs point toward a downtime for the automotive sector as the fiscal year trudges into the second quarter. Numbers per Pakistan Automotive Manufacturers Association (PAMA) show that the first quarter yielded a six percent decline in sales for passenger cars, jeeps, LCVs and tractors with Suzuki witnessing the biggest hit of 10 percent in its cumulative sales for 3MFY19, while Toyota losing volume in its high margin variants that had been gaining popularity throughout FY17 and FY18. Even motorcycles and rickshaws that have seen unabated growth over the past few years saw a three percent decline. Not only are these sales trends expected to endure in the foreseeable future, they could worsen further as OEMs increase prices, while bank financing becomes more expensive.
The economy is in recovery mode—interest rates had been raised and a subsequent increase is in the offing. The Kibor is expected to go into double digits. With the latest round of rupee devaluation, the PKR has slipped by a cumulative 26 percent since Dec-17 against the greenback.
OEMs had already increased prices thrice by 4 to 15 percent across variants as depreciation makes their imported content ever more expensive. The latest hit to rupee a few days ago forced Indus Motor (PSX: INDU) to halt its booking to assess the situation. The company in its notice explained that customers with provisional bookings will have to pay the price of the car, which is prevailing at the time of the delivery.
The company was able to keep its margins more or less intact during FY18 (17-18%) due to a flourishing demand for its Fortuner and Hilux and adjustment in prices in line with the increase in cost of production. The trade-off of further price accretion would be a loss in demand and sales, which given the overall economic downturn is already a near certainty. A good chunk of demand will also be lost prompted by the reinstatement of the restriction on ability of non-filers to purchase vehicles. Since 40 percent of car buyers are auto-financed, expensive financing will further discourage potential buys. Consumers in the middle-income groups will be the most sensitive to price increases and higher costs of borrowing, which means smaller and seemingly affordable cars will experience a much greater dent.
It could be argued that the decline in sales in 3MFY19 comes as potential car purchasers are waiting for the new variants and models about to be introduced in the market.
However, the economic slowdown is hard to ignore. It has derailed the momentum that the industry had created during FY18 while excitement toward new players has all but flattened.
In numbers, small engine cars like Mehran and Bolan, part of Pakistan Suzuki (PSX: PSMC) have been found to be the most sensitive to price hikes. The company’s pickup has also seen a significant drop in sales in the first quarter. Though even as Cultus sales dropped, Wagon-R continued to rally, selling 36 percent more vehicles during this period against last year. Mehran’s automatic version will soon get discontinued as the company prepares to launch the much awaited Alto, so its decline was foreseen.
Meanwhile, Honda Atlas Cars (PSX: HCAR) defying all odds saw a 15 percent growth in its Civic and City pair in 3MFY19 even as BR-V witnessed a drop. The cross-over SUV was witnessing a stellar run but changing price and affordability dynamics seems to have put a dampener on demand. INDU’s sales have shifted from the pricier variants of Hilux and consumer-favorite Fortuner back to the flagship Corolla.
However, as backlog depletes, prices and financing rates go up, and restriction on non-filers comes back with a vengeance, there are no stopping automotive sales to drop further. OEMs will have to decide between volumes and margins. While the currency has been depreciating, global commodities like steel and other metals are also witnessing price lurches which will make these imported inputs more expensive for OEMs, thereby raising their costs of production.
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