Autos: No love lost

The budget 2021 is not a love letter to anyone. The auto industry it seems is no different. Contrary to industry expectations, the budget did not lower Federal Excise Duty (FED) on automobiles and other taxes (including additional sales tax, additional customs duty etc.). Long before the deadly covid-19 slammed production and spending, demand in the automobile industry was slackening, only worsened now with country ravaged by the outbreak.

In group-wise production numbers under Large Scale Manufacturing (LSM), automobiles was a major contributor to the overall decline. It had the biggest hit during FY20—dropping by nearly 37 percent year-on-year, according to the Pakistan Economic Survey. In April, the industry registered zero sales (read more: “Autos dialing zero”, May 14, 2020) while May did not improve sales standing either. Despite the visible demand assault however, car makers have been revising prices upwards which kept most buyers away from the market (read more: “Car prices: Is there method to the madness?” April 17, 2020).

Without volumes, it is ridiculous that prices kept going up and it did no favors to companies’ bottomlines (Toyota overall performed better than Honda and Suzuki). It is unlikely that automakers will decrease prices as none of their tax reduction expectations were fulfilled in the budget.

With interest rates lowered, auto financing is cheaper which could spur demand, though that alone is unlikely to have any substantial impact. Except for Toyota’s new model Yaris (priced lower than Corolla), no new models by existing OEMs have been introduced which could pique renewed interest. Even if there was interest, and even if carmakers don’t raise prices further (due to the stable rupee), will there be demand?

Covid-19 has not peaked yet and projections for the ultimate end of the first phase of the novel virus are haunting. Spending has also slumped significantly across income groups and it is unlikely to be resuscitated any time soon as potential health costs go up exponentially. Consumers will be savvy enough to save for a time when such spending becomes necessary faced with a crushing public (and private) health delivery systems.

Any major recovery during FY21 will depend on not only how long it takes to beat the coronavirus but how long it takes for purchasing powers to return. Scientists don’t yet know how the virus affects the bodies in the long term once patients are cured. Many predict substantial long-term adverse illnesses and diseases to attack covid-19 recovered patients.

Pakistan is even more vulnerable because it is cash strapped and incomes are being cut across the board. It would be too optimistic to presume spending would return in the automobile industry despite knowing that the industry caters to a small share of the population in the first place. This is also why a company like Toyota (catering affluent income households) will fare better than Suzuki (catering the middle class), when demand slowly does come back perhaps toward the end of FY21.