They say the customer is always right. Well, customers of the local automotive industry are not happy with the recent double price hike for cars, believing them to be unfair. But are they right? Local assemblers along with the auto parts manufacturers believe the price hikes were inevitable borne by unavoidable circumstances. Since January when the first price hike came into effect, the three assemblers have raised prices between Rs10,000 to Rs300,000 along different low, mid and high range variants of cars, jeeps and pickups.
The price increase has been associated to high costs of manufacturing—not only rising costs for Completely Knocked Down (CKD) kits; but also locally manufactured auto parts. According to data reported by Pakistan Bureau of Statistics (PBS), cost of CKD imports for motorcars went up by 24 percent between July-Feb 2018. Interestingly, sales for cars, jeeps and pickups during the period also rose by 24 percent (only cars: 17%).
The industry has been making attempts toward localization without a lot of success. BR Research estimations suggest localization levels were around 51 percent during FY17—(read “The Fault in our Cars”, published Feb 6, 2018). On average, the share of imported content in car prices (included custom duties) is around 34 percent.
This number would be higher now since new variants such as Honda Br-V, Toyota Fortuner and Suzuki Wagon-R which aren’t as localized were not considered for these calculations. Other news media outlets quoting sources say auto assemblers are importing over 55 percent of their raw material.
It is no secret that the imported parts are more expensive because they are high-tech and functional, and local capabilities haven’t evolved enough to make them at home. Locally, parts manufacturers make tyres, wheels, metal sheets, dies and moulds, batteries and components that are cosmetic or surface level add-ons for cars. Localization of high-tech parts would involve a lot more investment in the auto parts industry and higher volumes. There hasn’t been any significant progress on either.
Reliance on imports means as they become expensive, costs of production rises. Between Dec 4, 2017 and Mar 30, 2018; Pakistan rupee has depreciated by 9.5 percent against US dollar and by 16.4 percent against Japanese Yen.
Meanwhile, steel prices also play a pivotal role. Auto parts manufacturers import steel items to make local parts which are also impacted by devaluation. Moreover, global steel prices have been on an upward incline due to Chinese overcapacity. Despite shutting down some units to curb production and protect environment, China’s steel manufacturing remained robust pushing global prices up for everyone else to suffer. However, steel prices recently have stabilized as demand for steel remained subdued in the wake of a built up of steel inventories.
The long run view on steel prices (according to US based General Steel Corporation) is that as China cuts production by 20 percent—demand will outstrip supply—resulting in higher steel prices till 2020. On the other hand, with Trump’s latest tariffs on steel and aluminum, some analysts are arguing supply across the world would increase as US market closes for steel imports, causing global prices to drop.
Based on PBS, steel imports into Pakistan have grown by 18 percent in value and by 12 percent in volume in 8MFY18, so per ton cost of imports has risen by 5 percent. For better or worse, steel would continue to impact cost of production of parts and automobiles.
The auto parts manufactures are also perturbed by the anti-dumping duties and regulatory duties on imported steel imposed by the government. They claim some steel varieties are not even manufactured at home; and that steel for them is now more expensive. Following these protection measures, local steel makers have also increased their prices.
It is clear that in order to maintain their margins, and given dependence on imports for both assemblers and auto parts makers, circumstances are not conducive to keeping end user prices the same. Consumers will have to adjust expectations. And seeing the way car sales are growing unabated, it seems they will.
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