As already established, car prices in Pakistan have increased on average higher than the depreciation of rupee against dollar over the past two years and during times when currency appreciated, prices did not follow a downward trend (read: “Car prices: One-way traffic”, Nov 18, 2020). Now despite the currency moving to mid-2019 level, both Pakistan Suzuki and Indus Motors have increased prices for a handful of variants starting today (see graph).
Whether there is any method to this madness i.e. does the currency depreciation really explain car price hikes since 2018 is an important question but it is more important to evaluate what impact this would have on the industry at large and consumers specifically. How unaffordable—exactly—are cars to the Pakistani consumer today and will this, if at all, affect volumes of these companies? Because after all, as long as demand is greater than supply, and consumers are willing to pay the incremental, auto companies have no incentive to keep prices stable.
Previous evidence suggests that despite price hikes, loyal customers kept buying these cars, unperturbed by rising prices. In fact, between Jan-18 and April-19, prices were raised six times for Corolla variants and volumes kept pretty strong month after month. Clearly, demand is not as sensitive to price changes as one would assume since these cars are brought mostly out of need and by an income group that can absorb the higher cost burden. This is not only valuable market intelligence that identifies consumer behaviors and their propensity to consume but also, provides an insight into auto companies’ business models of prioritizing margins over volumes.
Will these companies be sacrificing volumes going into 2021? Let’s examine. In 4MFY21, Toyota sales are up 87 percent while Suzuki sales are down 22 percent. But though model specific volumes are not available, Corolla sales actually dropped 82 percent during the period while Cultus sales dropped 15 percent (speaking only of variants that have witnessed the latest price bump).
Curiously, Toyota’s total volumes are being bolstered by the overwhelming response for the newcomer Yaris, rather than the company’s typical star performer Corolla. But if one takes into account the corona lockdown period where all sales dropped to zero for the month of April, Corolla decline would be taken with a grain of salt. Given that Indus Motors is now back and running on double-shift implies demand is strong and will continue to grow. The “own” charged by market dealers and sundry for Corolla is another indicator that demand will persevere and rebound. At the most, Yaris will now claim more attention of consumers and may even pinch some of Corolla’s market share but the latest price increase despite currency appreciating by 5 percent indicates one important thing: Indus Motors is not worried.
Suzuki is another story. The company is in losses and there is no visible demand recovery. But there is hope that it will pull back volumes over the next few months despite competition from Kia. This is because, used car imports are on a virtual close down and no longer coming in the market by the thousands due to government restrictions. There are simply very few imported cars (Japanese 3-year old) available in the market at the moment, that typically gave Suzuki a run for its money in the past. The path for Suzuki’s rebound is clear, at least, from competition.
However, on the other end is the Suzuki consumer. The company is no longer making customer favorite and fairly affordable Mehran, replaced by higher-priced Alto, Wagon-R and Cultus that are not meeting expectations set by their worthy predecessor—as far as volumes are concerned at least. This is the segment where consumers with limited savings operate and may find it more difficult to absorb the additional price. This explains Suzuki’s weak performance.
Then there is the curious case of auto loans which are trailing their historic highs as we speak. Given today’s lower interest rates, and accounting for the price increase that came two days ago, car financing is cheaper today for nearly all variants by Rs2000-6000 per month against what they paid this time last year. At that time, interest rates were pretty high. This falls in favor of auto makers, since if consumers went for auto loans, they are better off today—despite the many, many price increases—than they were last year.
But wait! Compared to prices and interest rates in Dec-18, or going back further in Jan-18—about two years ago—consumers will pay an additional Rs10,000 to a whopping Rs25,000 per month on the same auto loan (assuming: Kibor+4%, and for the purpose of this analysis, only Corolla, Cultus and Swift are considered). If that’s not a shocker, nothing will be, since incomes have not grown by that much. For Suzuki buyers, it will be ever more difficult to pay this extra monthly amount. These customers would need a great amount of motivation to buy a Suzuki vehicle—either on cash or credit.
But once again, upcoming sales volumes—whether it is Corolla or Cultus—given ground realities as they stand will provide crucial information about the typical car buyer in Pakistan and how they behave. That the automobile market will expand has been a speculation for several years which has brought several new players to the horizon, but given income levels, current car prices and the cost of financing, there is no question that new cars will continue to tap only a certain segment of the economy and will probably not reach a different type of Pakistani consumer (from what they are used to) any time soon. For that lot, there is always the second-hand car market. More on that later.