That the first automaker to raise prices after FY20 budget was tabled is not Suzuki or Toyota, but Honda, comes as a surprise. The budget has proposed slashing FED for vehicles 1700cc & plus engines, and imposed new FED on 660cc-1700cc cars. Honda’s Civic falls in the former category, while its City falls in the latter. The company cited rupee depreciation once again for its price bump ranging from Rs260,000 to Rs425,000. But if the proposed FED gets approved by the National Assembly, the key question would be: will Honda pass that on to its customers?
The short answer is: no. Prices are only ever increased by automakers, whether good times or bad. Despite their insistence on their high localization levels, assemblers are heavily reliant on imports which are sensitive to commodity prices abroad as well as exchange rate fluctuations. Local auto parts makers on the other hand, rely on imported inputs (steel, rubber, leather etc.) as well. Perhaps if either automakers or auto parts sellers were exporting, they could mitigate some of that debilitating exchange risk. But they neither have the capacity, nor the competitiveness to find market access abroad. Investments have not come in as much as they could have to create those much-needed volumes.
Research shows that car demand in Pakistan is not as sensitive to prices as it is to income changes (read: “Autos: For whom the bell tolls”, Mar 27, 2019), but there is an extent to which car buyers can absorb the extra burden. Cost of borrowing is also going up with monetary policy tightening. Taxes and inflation have already reduced the buying power of consumers. That impact would be seen across all income groups, with heavier load to be shouldered by the middle to low income segments of the economy.
Sales across different variants are demonstrably low already. Though it is interesting that reduced demand has manifested in high-income car segments (Honda down 7%, Fortuner and BR-V down 40% in 11MFY19) much more than in the lower ones. Part of that reason is the increase in prices has been much higher for these cars. By May-19, Honda Civic’s price had gone up by 32 percent, Honda City by 22 percent. Comparatively, Suzuki Cultus saw its price go up by only 14 percent since Jan-18.
Needless to say, once the FED proposals get approved, Suzuki and Toyota will also be raising prices, perhaps even higher than the FED itself to incorporate the effect of recent rupee depreciation. The FED goes like this: from no FED before, cars up to 1000cc will have 2.5 percent FED, cars between 1000cc-1700cc: 5 percent while from FED of 10 percent, cars between 1700cc-2000cc will see it come down to 5 percent and to 7.5 percent for 2001cc above cars.
For the past two years, auto price hikes have been abnormally frequent, closely pegged to rupee’s movement. Each time, rupee dipped, prices were raised. So far, automakers have raised prices eight times since Jan-18.
So here’s the question: the SBP governor recently informed the audience that Pakistan has been moved to market based exchange rate, though the central bank will be closely monitoring volatility and keep a check on inflation. It will certainly take time for the market to adjust to this new normal. However, if the rate dips and rises over time, automakers much like other sectors that are dependent on imported goods for their final product will have to go back to the drawing board and come up with a better methodology for setting end user car prices, than the current one of raising prices on a loop. Perhaps automakers have made do so far given the dismally low market size, but things are expected to change on that front.