Car sales were resistant to the multi-phased price hikes so far, but after sixth or seventh bump since Dec-17, volumes may very well start to dwindle. Automakers were really testing domestic appetite for new cars but the cumulative growth was delivering, albeit sluggishly, until now. March, April and this first week of May has seen more hikes (see graph)—Honda City’s price is now up by nearly Rs400,000, Corolla by Rs465,000 and Civic by a whopping Rs800,000. This is more for higher end variants. But automakers have had little choice.
Both Pakistan Suzuki (PSX: PSMC) and Indus Motors (PSX: INDU) published their quarterly financials which telling a somber tale for the two automakers. For the quarter ending Mar-19, Indus saw its after-tax profits fall by 22 percent with a top-line growth of 13 percent while margins shrank from 17 percent to 12 percent. Bad, not as bad as Suzuki that saw a loss for the first time in a decade. The company informed of a loss per share of Rs11.92 with a top-line growth of 12 percent. Gross margins shrank down to a paltry 3 percent against 8 percent in the quarter last year. With the depreciating rupee, and given automakers reliance on CKD import units, they cannot be faulted for the price increases.
With fresh price hikes, the lethargic growth may pull a reverse gear but car prices may not be the only determinant of how demand will fare in the upcoming months. There is no doubt that the country is entering a state of economic emergency. Already, the dual impact of price escalation and interest rates was a significant increase of Rs10,000-16,000 in monthly payment to a customer purchasing a Honda City (read more: “Stuck on a one-way road”, April 3, 2019). How much more can a consumer absorb on a monthly basis from his reduced purchasing power as overall inflation moves up? Data shows car financing has significantly come down. However, one could argue that even for cash buyers who are tapping into their savings, the incremental increase may proof to be much. They could easily wait out the storm.
Secondly, as the recent Pakwheels survey showed, 64 percent of the consumers are going for used cars—mostly local (read: “What does a car buyer want”, May 6, 2019). Those consumers in urgent need of a car may opt for an older model in the secondary market rather than going for a new car.
It is now evident that reduced production and loss of demand is unavoidable, which will affect automakers’ cumulative bottom lines. The only variable is by how much.
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