Autos waning demand

The combined decline in demand in the automotive industry has now reached double digits in 10MFY19 (including passenger cars, jeeps and commercial vehicles). Motorcycles sales have fallen by 7 percent as well. In the beginning of the fiscal year, passenger car sales were still growing, and the decline was really being seen in the commercial vehicle segment—particularly in the pickups and the trucking segments but as we come close to the end of the year, each segment is buckling down under the pressure.

Part of the reason is the month after month price increase over the past year or so since the rupee started to slide. Automakers have come under the pressure due to their dependence on imported parts while part makers also depend on imported raw material. The rupee devaluation has affected the entire auto value chain. But automakers were always faced with the chance that they would lose the volumes if they persistently raised prices. At some point, consumers will back off and wait for the tide to die down.

This tide however will take a while to recede as the economy is faced with multiple macroeconomic challenges. Higher inflation for one has reduced purchasing power of consumers. Financing has already been down as cost of borrowing has risen sharply—and is expected to further incline. It comes down to consumers buying on cash and their purchasing power to absorb the extra price burden. One could argue that buyers of Honda and Corolla often buy cars on premium which can go from Rs100,000 to Rs600,000 in some cases, so the price hike that is ranging from Rs150,000 to Rs800,000 could in theory be absorbed for an authentic buyer.

However, numbers are injecting pessimism which started with SUV Fortuner and cross-over Honda BR-V and has seeped into other variants. After heading to the showrooms for the better part of the year, consumers are finally taking a step back. And this step will stay back; it seems (see graph and table for numbers).

Of the three automakers, Indus Motors has persevered with strong Corolla sales while Suzuki’s Wagon-R and Cultus are surprisingly still witnessing positive growth as well. When buying power goes down, luxuries are the first to take a hit. However, the Pakistani market has recently defied that logic, perhaps because for many consumers, cars may not be a luxury good. Nevertheless, the upcoming cars—Suzuki with new Alto, Kia and Hyundai with fresh launches—are entering an uncertain and lethargic market space with a shrinking financing space. Good luck to them, because they sure need it.