The government and automakers—new and old alike—are finally on the same page. This meeting of the minds reflects in the new auto policy that comes into effect as FY21 wraps up. The goal is to increase volumes by hook or by crook but which volumes, it does not really matter and that suits the industry. So far, price reduction announcements suggest most cars will cost 3-6 percent less than they did over the past year. But between Jan-18 and Dec-20, price hikes—where automakers cited rupee depreciation as the primary cause—were a whopping 52-57 percent for Indus Motors and 42-45 percent for Suzuki (read more: “Car prices: Behind the veil”, Dec 3, 2020). Currency depreciation during the period was 44 percent.
Mind you, when rupee appreciated against the dollar, the industry did not bat an eyelid. This time, the price declines do not come out of the goodness of big auto companies’ hearts. It comes due to FED and sales tax reduction across different vehicles (read more: “Auto policy: Theatre of the absurd”, July 12, 2021). The government meanwhile, expects to make up for lost revenue through higher volumes. But would a Rs100,000 price decline—in the case of the most selling Toyota vehicles like Yaris and Corolla—trigger a massive jump in volumes? It seems unlikely that folks who are not already planning to buy these vehicles i.e., those who do not already have the ability to purchase them would suddenly decide the price decline justifies such an expenditure.
In fact, there have been instances in history, especially when the first set of price hikes began to roll in (during FY19), that demand was not affected that much due to the rising price. Pakistani car buyers are not as sensitive to car prices as one would think. Having said that, cheaper auto financing due to lower prevailing interest rates can certainly help change the volume game. In fact, at current kibor+4 percent, consumers will pay between Rs1,500-Rs4,200 less every month on a car loan for different cars ranging from 660cc all the way to an SUV (read more: “Autos loans: Getting on the fast lane”, July 02, 2021) due to the government’s tax-cuts for automakers, and the resulting reduction in prices.
The government perhaps understands that price cut alone—especially one that is caused entirely by a tax-cut—cannot increase market size. It is now planning to introduce a subsidized car financing scheme very soon which could potentially bring more buyers, who were otherwise not able to buy these vehicles, to the market.
Would volumes justify the dual-subsidy remains to be seen. Expect imports of both CKD and CBUs to increase. There are actually duty cuts on imported vehicles in CBU form. The motivation here is to give more competition to OEMs by reducing the price delta between imported and local cars but in truth, this merely incentivizes import of vehicles which would certainly increase the import bill.
On a slight upside, there are conversations on localization as well as slapping safety regulations on domestic automakers. That’s great if done right. The former is being done through an SRO where any auto part that is localized by an assembler would incur a higher import duty putting those companies that are not localizing that part at a certain cost disadvantage. This would be either a big hit or big miss.
Automakers have always blamed the lack of volumes for their limited localization and if one automaker were to localize a certain part, it would be fairly easy for others to follow suit since there are only a handful of auto parts manufacturers in the country who provide the same components to all the OEMs. But that means, the automaker to take the leap into localization will have to invest more on it by providing the initial support to the auto parts manufacturer. Why would that OEM do that?
Given that the government is already spoon feeding these manufacturers, it should ideally sit down with auto makers as well as auto parts manufacturers to compile a list of components that can be localized over a certain period of time so that OEMs can plan to make (and invest in) more parts together instead of remaining reticent and waiting for someone else to make the big move. After all, the biggest problem with auto OEMs is their fondness for complacency.
As we close FY21, there are many balls that could land in the goal post but the question remains whether it is the right goal-post or not. How did FY21 fare and what will be the dynamics over the next year—more on that next time.