Automotive demand finally gave in to pressure. All signs pointed toward a demand weakening even if automakers remained confident about their decision to raise prices four times, five in the case for Suzuki, over the span of a year. Perhaps, the sacrifice for volume was one they were willing to make. Industry sales excluding two and three-wheelers have dropped by 6 percent in 5MFY19 while rickshaws and motorcycles together declined by 1 percent during the period year on year. The decisive fall came in November as sales across the board plummeted during the month. Cars, jeeps and commercial vehicles declined by 31 percent while two and three-wheelers by 22 percent month-on-month according to numbers reported by Pakistan Automotive Manufacturers Association (PAMA). Prices for latter were also raised.
Demand for pickups and trucks have waned considerably which raises a lot of questions about the logistics and transport industry. Have logistic companies, fleet managers, freight forwarders, private and commercial transporters had their fill over the past year? Is the trade and logistics business not growing as much as it was supposed to? Are locally assembled vehicles being replaced by imported trucks? The demand for trucks was meant to consistently grow due to CPEC and related activities. In fact, this was a major driving factor into the increasing interest of global giants like MAN SE and Volkswagen to look toward this market, not to mention a host of Chinese LCV players. Is the slowdown just a temporary fluke?
Surprisingly, bus sales have persisted which is a flip from last year when they were declining month after month.
Stakeholders have standard answers. Aside from the general uncertainty that has enveloped the country since the new PTI government took over and jumped head first into recovery mode, it looks like the hike in cost of borrowing, substantial and successive increase in vehicle prices and the restriction on non-filers to purchase vehicles have finally caught on with consumers. Automakers have had to raise prices due to the depreciating rupee and persistent upward trend of input prices both locally and internationally procured. These together have cost of production that much higher.
Let’s not forget that Honda and Toyota will both raise prices further in Jan-19. Moreover, further monetary policy tightening, and another round of rupee devaluation may lead to companies raising prices even higher, inevitably to the determent of their volumes.
It is rather interesting that while November brought bad news for all parties, in the overall period approaching half year, sales for Corolla, Honda City/Civic and Suzuki Cultus and Wagon-R have all grown. These have been historically high-demand cars and no doubt, consumers have had some tough choices to make. Whether to buy now or wait for circumstances to improve. Some consumers have weighed their odds and bought the cars now instead of waiting until further price hikes. This may be the case of buyers of Wagon-R and Cultus who have had no choice but to bite the bullet now, or for Toyota and Honda lovers. A lot of the latter cars are already brought on premium, where consumers are willing to part with more money to get the cars when they need.
Going forward, those consumers tilting toward middle to low-end cars will likely shift to used cars (as they tend to be more sensitive to prices) or delay their car purchasing decision altogether, if they can. More than 30 percent of all car buyers are purchasing them on financing. Higher cost of borrowing will crush the prospective middle-class car buyer sooner or later. Meanwhile, buyers of high-end vehicles (think SUVs) who view cars as luxuries should be deterred by inflation. Already Fortuner and BR-V sales have taken a nosedive.
It is a toss-up for buyers of Corolla and City/Civic. Consumers end up surprising the market by their resilience when it comes to the variants, but these are the car buyers that will inevitably set the tone for the future. A host of new players are bringing a variety of cars targeting the very same segment. With more choices to make in the future, will these car buyers remain loyal to their brands now—which are getting expensive each month—or be willing to explore new brands later, even without any promise of lower prices. The jury is out.
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